by Dimitri P. Racklin
On November 22, 2011, Governor Deval Patrick signed into law “An Act Establishing Expanded Gaming in the Commonwealth” (the “Act”), codified primarily at M.G.L. ch. 23K §§1 ff. (available here). With the Act’s authorization of commercial casino gambling and creation of a regulatory framework for the casino industry in the Commonwealth, Massachusetts has joined the growing list of states which have legalized commercial (as contrasted with Indian tribal) casinos in recent years.
The Act reflects the legislature’s decision to establish a limited-franchise gaming industry, opting for a limited number of licensed casinos guaranteed regional exclusivity rather than open-ended authorization of unlimited participation – and competition – in the industry (subject only to licensing requirements focused on ensuring probity, suitability and financial stability). The choice likely means that the development of the Massachusetts gaming industry will take place in two related but in some ways distinct phases. The initial phase will involve the initial award of up to four casino/racino licenses and the various activities associated with start-up (approval/permitting, construction, fit-out and launch). “Initial” should not be confused with “short” in this context, however; recent remarks by Stephen Crosby, the Commission’s first chairman, reportedly suggest a period of three to four years before the casinos open for business. Once the initial phase is completed, the industry (and the Massachusetts gaming commission (the “Commission”) regulating it) will likely settle into the second phase, focused on day-to-day operational and regulatory tasks and an occasional potential transaction such as sale of a licensee – until the initially granted licenses expire and renewal applications bring back, at least in part, the more concentrated activity of the initial phase.
The gaming industry is, of course, a heavily regulated one in all relevant U.S. jurisdictions, and Massachusetts will be no exception. Overseeing the new Massachusetts gaming industry will be the new five-member Commission which is granted wide regulatory, licensure and enforcement powers under the Act. Since one of the Commission’s primary regulatory tasks will be to ensure the financial stability, integrity and suitability of gaming industry participants, see M.G.L. ch. 23K §§1(2), 1(3), 1(9)(iii), 12(a)(1)-(2), the Commission will have within it an investigations and enforcement bureau (the “Bureau”) as the primary enforcement agent for the Commonwealth’s gaming regulatory regime. M.G.L. ch. 23K §6(a). The Bureau will work together with the gaming enforcement unit of the Massachusetts State Police, the division of gaming enforcement in the department of the Attorney General and the gaming liquor enforcement unit of the Alcoholic Beverages Control Commission. See M.G.L. ch. 23K §§6(c), 6(d), 6(g). The Act designates the Bureau as a law enforcement agency, M.G.L. ch. 23K §6(b), and expressly grants it the authority to exchange information with other gaming authorities and law enforcement agencies, both domestic and international. M.G.L. ch. 23K §6(e).
Perhaps not surprisingly given its long gestation, the Act is much more than simply enabling legislation, and is quite detailed – indeed, prescriptive – in a number of respects. Not only are the gaming tax rates and minimum capital investment amounts and licensing fees set by the Act, but numerous topics of arguably lesser import are also spelled out in detail. Nonetheless, many issues which will doubtless be of interest to industry participants remain to be addressed by regulation and Commission practice. In fact, M.G.L. ch. 23K §5(a) is devoted entirely to a list of matters which the Commission is directed to address by regulation, and some of the Commission’s powers enumerated in M.G.L. ch. 23K §4 could effectively constitute such matters as well. Even from the face of the Act alone, the Commission is unlikely to run out of things to do.
As the gaming regulatory regime develops, below are a few topics for gaming business clients and their lawyers to consider.
- In the initial phase, the Commission is tasked with determining whether “the purchase or lease price of the land where the gaming establishment will be located or any infrastructure designed to support the site” will be included in the minimum capital investment requirement for a Category 1 license. M.G.L. ch. 23K §10(a). Obviously, the Commission’s decision on the topic could have a material impact on the economics of an applicant’s license proposal.
- The Act requires an applicant for a gaming license and “any person required by the commission to be qualified for licensure” to “establish its individual qualifications for licensure to the commission by clear and convincing evidence.” M.G.L. ch. 23K §13(a). Qualification for licensure is also required under the Act for “anyone with a financial interest in a gaming establishment, or with a financial interest in the business of the gaming licensee or applicant for a gaming license or who is a close associate of a gaming licensee or an applicant for a gaming license,” M.G.L. ch. 23K §14(a), as well as “any person involved in the financing of a gaming establishment or an applicant’s proposed gaming establishment.” M.G.L. ch. 23K §14(e). Clearly, terms such as “financial interest,” “involved in the financing” and “close associate” (and the related term “significant influence” comprising part of the definition of “close associate,” M.G.L. ch. 23K §2), are deliberately broad and designed to permit the Commission the greatest latitude in requiring industry participants to be qualified for licensure.
The gaming industry licensure qualification process is often seen as quite burdensome, however. For example, the Multi Jurisdictional Personal History Disclosure Form promulgated by the International Association of Gaming Regulators (“IAGR”) is 66 pages long and requires disclosure of, among many other things, all places of residence in the last 15 years and all employment in the last 20 years (or since the age of 18, if less), including any employment-related “infractions” in the last 10 years. Nonetheless, industry participants much prefer use of that form across multiple jurisdictions to having a separate form for each jurisdiction, and so will doubtless advocate for adoption of the IAGR form by the Commission. Experience from other jurisdictions indicates that cost (borne by the applicant) of background investigations relating to gaming licensing applications conducted by the gaming regulatory authorities (i.e., the Bureau in the Commonwealth) can reach hundreds of thousands of dollars even in only moderately complicated cases. Therefore, it will be interesting to see whether regulations and Commission practice as it develops over time will offer any further guidance as to whether particular financing mechanisms (such as conventional debt financings) or arguably de minimis amounts will receive any systematic relief from the qualification requirements.
Given the nature of the licensure qualification process, it will come as no surprise that many traditional commercial loan market participants – commercial banks, private equity firms, hedge funds – have little experience with gaming licensing requirements and are typically reluctant to subject themselves to the qualification process. Yet, the wording of the Act could, if read literally, subject even Main Street banks and other institutional providers of the plainest of commercial loans to the gaming licensing regime. These days, of course, many conventional loan arrangements come with equity features, such as warrant coverage or equity “kickers,” which could be even more troublesome for the Commission (or the Bureau) interested in vetting everyone with a “financial interest.” Convertible debt in material amounts will be even more easily viewed as an equity equivalent and therefore require qualification for licensure. As a result, therefore, the parameters of these requirements as they are established by the Commission over time and applied to debt capital providers will likely be of interest to many practitioners and their clients.
In the equity realm, it will be interesting to see whether the Commission finds it appropriate to give any regulatory relief from the general licensure requirements to employee stock options, restricted stock or similar incentive equity instruments held in immaterial amounts by employees who are not “key gaming employees” subject to licensure in any event, see M.G.L. ch. 23K §2 (definition of “Key gaming employee”). Arguably, such instruments in the hands of rank-and-file employees not directly involved in gaming operations could be natural candidates for an express (if carefully limited) regulatory exemption from the qualification requirements.
- Another topic of particular interest to transactional lawyers will be whether the Commission will permit any pre-clearance procedures for transactions involving change of control of a business subject to licensure or any related assets. See M.G.L. ch. 23K §21(b) (prohibiting such transfers without Commission approval, subject to a specific grant of authority to the Commission to create exemptions by regulation). Such a business does not have to be a multi-billion dollar casino – it could be a gaming equipment manufacturer, a security system installer or software company, or another vendor whose products or services “directly relate to gaming,” see M.G.L. ch. 23K §2 (definition of “Gaming vendor”). Even much more mundane casino-related businesses (e.g., a laundry service provider to a casino-related hotel) could be subject to registration or, depending on volume of business, even full-fledged licensing requirements. See M.G.L. ch. 23K §31(d). The Act, however, requires that, with respect to any contract for sale of, or grant of a security interest in, a gaming-related business “under circumstances which require that the transferee obtain licensure under [the Act]…, the contract shall not specify a closing or settlement date which is earlier than 121 days after the submission of a completed application for licensure or qualification, which application shall include a fully executed and approved trust agreement.” M.G.L. ch. 23K §23(c). Obviously, a very considerable amount of uncertainty and delay could be removed if the prospective buyer of a gaming-related enterprise could be pre-cleared by the Commission prior to the closing of the acquisition. Availability of a pre-clearance process could be very attractive to the industry despite the not insignificant cost of the Bureau’s investigation that the prospective transferee would likely have to bear in advance of its purchase of the gaming-related business in question.
The above topics represent only a few examples of areas where future Commission action will likely be of great interest to industry participants and their counsel. Any number of others easily merit attention. For example, a number of Commission decisions are stated by the Act not to be subject to any further review, raising questions about the extent to which a Commission decision may be challenged on the ground that it is arbitrary or capricious, or on any other grounds. Answers to this and many other questions are likely to be forthcoming only in the fullness of time. It is already clear, however, that the development of the gaming industry and its regulation and oversight in the Commonwealth over the years to come should provide many opportunities and challenges for the practitioners and clients alike – and for the regulators as well.
 Prior to 1989, casino gaming was permitted only in Nevada (since 1931) and New Jersey (since 1976). Iowa and South Dakota each legalized casino gaming in 1989, and since then another 19 states joined the list in one form or another, with Massachusetts being the most recent addition as of this writing.
 The Act authorizes establishment of three Category 1 casinos (one each in the Greater Boston area and in the southeastern and western regions of Massachusetts, with the southeastern Category 1 casino subject to some extent to the Commonwealth’s efforts to negotiate a compact with one or more Indian tribes seeking to operate casinos in the region), envisioned as full-fledged destination casino and entertainment complexes, and a single Category 2 “racino” featuring slot machines only (not table games) which could be established at a live or simulcast racing venue.
 See D. Ring, Massachusetts Gaming Commission chairman defends timetable for licensing casino resorts, MassLive.com, published at http://www.masslive.com/news/index.ssf/2012/04/leader_of_massachusetts_gaming.html (April 25, 2012).
 The Act provides that Category 1 licenses will be granted for 15-year terms (presumably, from the date of issuance by the Commission, although the Act is less than specific on this point). If it is granted, the single Category 2 license will be for a five-year term.
 Legislative debate on the issue of gaming in the Commonwealth dates back to 2002 if not earlier. See, e.g., Dice or No Dice: The Casino Debate in Massachusetts, University of Massachusetts Boston, College of Management, Financial Services Forum Spring 2011 Report (available at http://www.umb.edu/editor_uploads/images/centers_institutes/financial_services_forum/DiceOrNoDice.pdf), at 4.
 At 25% (of gross gaming revenue), $500 million and $85 million for Category 1 licenses and 40% (plus a 9% Race Horse Development Fund assessment), $125 million and $25 million for the Category 2 license, respectively. See M.G.L. ch. 23K §§10(a), 10(d), 11(a), 11(b), 55. The Commission does retain discretion to impose higher capital investment requirements and licensing fees (but not tax rates).
 For example, the Commission’s findings on a given casino application must address, among other things, the applicant’s proposal for “procuring or generating on-site 10 per cent of its annual electricity consumption from renewable sources qualified by [the Commonwealth’s] department of energy resources…” M.G.L. ch. 23K §18(8)(vi).
 See, e.g., M.G.L. ch. 23K §4(14) (granting the Commission the power to “determine a suitable debt-to-equity ratio for applicants for a gaming license”).
 See, e.g., Ring, supra n. 7 (reporting that “Ameristar [Casinos] paid $16 million for a 41-acre site… in Springfield” apparently intended for a planned casino).
 See, e.g., M.G.L. ch. 23K §17(g) (“[a]pplicants have no legal right or privilege to a gaming license and shall not be entitled to any further review if denied by the commission”).