Update on U.S. Internet Gambling: New and Pending Federal and State Legislation and Regulation by Mark Hichar Partner, Edwards Angell Palmer & Dodge

PRV 1062810.1

Pending Federal iGaming Legislation:

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The "Frank Bill" Rep. Barney Frank (D-MA) - May, 2009 Companion Tax Bill Rep. Jim McDermott (D-WA) – May, 2009 Bill to Delay the UIGEA Regulations Rep. Frank - May, 2009 "The Menendez Bill“ Sen. Bob Menendez (D-NJ) - August, 2009 Tax Reform Legislation Including iGaming Sen. Ron Wyden (D-OR) and Sen. Judd Gregg (R-NH) - February, 2010 2

The Frank Bill (H. 2267)

 Licensing Requirements for iGaming operators – all types of games, except sports-betting – 5 year license term, renewable  Only licensed operators could accept bets from persons in the U.S. (Treasury would be licensing authority)  Vendors managing or controlling bets would have to meet the same suitability criteria as licensees  States and Indian tribal authorities could "opt-out"  Payment processors not liable if following State law  Status:    66 Co-sponsors as of March 15, 2010 Committee Hearing Held December 3, 2009 Now with Subcommittee of House Judiciary Committee 3

McDermott Bill (H. 2268)

 License fee due from iGaming operators – 2% of amounts deposited per month  Fee for allowing unauthorized wagering accounts – 50% of the amounts deposited  iGaming operators required to file returns identifying players, their gross and net winnings, and gross wagers  Withholding of taxes on net iGaming winnings Status:   Had 5 Co-sponsors as of March 15, 2010 No Hearings or other actions.

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The Bill to Delay the UIGEA Regs (H. 2266)

 Would extend from December 1, 2009, to December 1, 2010, the deadline for compliance with UIGEA regs   Status:     55 Co-sponsors as of March 15, 2010 Committee Hearing Held December 3, 2009 No subsequent action Probably obsolete in light of 6-month delay granted No further delays expected  UIGEA Regs to take effect June 1, 2010 5

The Menendez Bill (S. 1597)

 Licensing Requirements for iGaming operators – Only covers skill games. Sports betting excluded.

– 5 year license term, renewable  Peer-to-peer poker only  Only licensed operators could accept bets from persons in the U.S. (Treasury would be licensing authority)  Monthly Fee – 10% of funds deposited for wagering - ½ to Fed Gov’t; ½ to participating States and Tribes  States and Tribes could "opt-out"  Requires creation of a list of unlawful iGaming operators  Status: No action taken – No sponsors 6

The Wyden/Gregg Bill (S. 3018)

 Similar to Frank/McDermott but not stand-alone        License fee same – 2% of wagering sums deposited Reporting the same Licensing requirements the same License term the same – 5 year, subject to renewal Same suitability requirements Similar requirement to address problem gambling Similar “opt-out” right for states and tribes  Status:  Bill Has 2 Co-sponsors as of March 15, 2010  No Major Actions.

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UIGEA Developments

 The UIGEA Regulations:    were to take effect December 1, 2009 delayed until June 1, 2010 (on Nov. 27, 2009) fulfill the UIGEA's requirement that banks and transaction processors establish procedures   to permit identification of restricted transactions to decline or block those transactions Mid-November, 2009: MasterCard changed its Rules   Required card issuers (banks) to decline ALL iGaming payment transactions  MasterCard has issued new Card Acceptor Business Code: MC 9754 (Gambling – Horse Racing, Dog Racing and State Lotteries) – effective June 1, 2010 8

iGaming Activity in Certain States

 New Jersey Bill Pending  Florida Bill Pending  California Activity  Illinois recently-enacted legislation 9

New Jersey Poker Bill filed January, 2010

 Atlantic City casinos could be additionally licensed to offer iGaming intrastate to NJ residents -- all games except sports wagering  Licenses valid for one-year, subject to renewal  Annual taxes 20% of gross wagering revenue  Licensing fees $200k initially, $200k/yr thereafter  All gaming-related equipment would be required to be located within Atlantic County, NJ  iGaming terminals (could be identical to slot machines) could be placed at tracks – with tracks’ agreement 10

Pending Florida Poker Bill – February, 2010

     Internet hub operators licensed to run poker sites for offering peer-to peer (“unbanked”) intrastate poker Hub Operator Fees/Taxes  $500k initial license application fee  10% of monthly gross receipts fee  Tax of 20% of monthly gross receipts from play “Cardroom Affiliates” additionally licensed to provide portals to poker network – fee 4% of gross receipts Players’ per hand fee: flat, hourly, or % of pot Hub Operator Required Qualifications include:  licensed to operate gaming or lottery in the U.S.  licensed to conduct iGaming where legal in one or more jurisdictions outside the U.S.

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California iGaming Activity

 California lawmakers considering legalizing Internet poker to raise revenue  Morongo Band of Mission Indians in favor of their proposal  Other California Tribes are opposed   Believe fewer will visit brick-and-mortar casinos Argue iGaming would violate tribal compacts  A California Senate committee held an informational hearing in February, 2010, but no formal Bill yet 12

Illinois Law Enacted and Amended in 2009

 Contemplates a pilot program whereby Illinois lottery games would be sold intrastate via the Internet  Requires DoJ review of the implementation plan  Plan will go forward only if the DoJ “does not object . . . within a reasonable period of time after its review.” 13

THANK YOU

Mark Hichar, Partner Edwards Angell Palmer & Dodge, LLP tel: +1 401 276 6588 fax: +1 401 276 6611 [email protected]

111 Huntington Avenue Boston, Massachusetts 02199-7613 USA 2800 Financial Plaza Providence, Rhode Island 02903 USA 14