Briefings
Betting and Gaming: iGaming firms are not your typical IPO
Betting and Gaming
Information Technology
Intellectual Property
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| January 2005 |
A number of online gambling companies and service providers are currently considering an initial public offering ("IPO") on the London stock markets, enticed by the prospect of the enactment of the Gambling Bill and favourable levels of taxation. Any IPO on the London stock markets would need to take account of numerous issues, including the fact that online gambling companies (1) operate in a field which is usually regulated in some form or another in most countries, (2) are highly dependent on technology, and the creation and use of intellectual property rights ("IPR"), and (3) may need to undertake some form of corporate restructuring in order to rationalise group structures. The following issues should therefore be addressed as far in advance of an IPO as possible.
1. Legal and regulatory issues
An online gambling company with a USfacing business will, for example, have to consider the inclusion of specific risk factors in its prospectus dealing with the fact that US laws restrict both online sportsbetting and online casino gaming. The recent re-election of George W. Bush is anticipated in some quarters to lead to further steps being taken by the US enforcement authorities to prevent offshore gambling businesses from accepting or taking steps to obtain bets from US residents, and any new developments in this regard may form the basis of further prospectus risk factors.
The risk factors in the prospectus will not only address issues which arise as a matter of law, but also issues which arise as a matter of fact or practice. For example, the recent decision by American Express and Citigroup to prevent UK customers from using credit cards issued by those companies for online gambling is an example of a business risk rather than a regulatory restriction, but it may still be relevant for disclosure in the prospectus.
A vital issue for all online gambling companies which are considering listing on the London stock markets is the application of the UK's money laundering laws and regulations. The Proceeds of Crime Act 2002 ("POCA") contains provisions which online gaming companies may find particularly problematic concerning the handling of 'criminal property', since these require an analysis of whether their activities would be lawful if conducted in the UK. (POCA) will require all online gambling companies looking to come onshore in the UK to examine the way in which any remaining offshore interests conduct business. In addition, the Money Laundering Regulations 2003 currently require casinos to implement procedures designed to enable the identification of likely money laundering activities, including the appointment of a money laundering officer, and the UK Government is considering extending these requirements to betting enterprises.
2. Technology and IPR issues
The IPO process is likely to focus on all IPR used by the company, in order to establish whether the company validly owns or licences the relevant rights. It is often the case that much of a company's valuable IPR are created by employees whose employment contracts do not contain adequate assignment provisions, thereby leaving the company in an exposed position. A company should ensure that all of its employees have signed a modern employment contract which contains suitable provisions relating to IPR. To the extent that a company licenses key elements of its technology platform from a service provider, the company should ensure that all relevant contracts are properly executed, complied with, and that they do not contain unduly onerous provisions.
The due diligence process which will support the prospectus will address matters of best practice as well as matters of law. For example, while there is no English legal requirement for a company to have implemented suitable disaster recovery plans, the failure to do so in practice may lead to embarrassing risk factors appearing within the prospectus. The disaster recovery plans of an online gambling company should address issues such as denial of service attacks. Adopting such matters of best practice in a proper manner is likely to take time, and this is best done in advance of beginning the IPO process.
3. Corporate Restructuring and Tax issues
Many online gambling companies have businesses located in a number of different jurisdictions. In order to IPO on the London stock markets, it may be necessary to conduct a corporate reorganisation to rationalise the group structure and ensure that there is a suitable company as the main holding company. Specialist tax advice should be sought as to how this may affect the overall liability to taxation of the holding company. This is because, in the case of an English holding company, any of its subsidiaries which are based in low tax jurisdictions may be treated as "Controlled Foreign Corporations" by the UK tax authorities, with the result that the profits of those subsidiaries are included in the English holding company's own profits for the purposes of determining its liability to UK taxation. Tax structuring advice should be sought in order to minimise the risk of excessive taxation.
As part of this review, companies should consider the 're-domiciling' of important parts of its group if appropriate, and the taxation implications for the individual shareholders behind the business in order to minimise the nexus with particular jurisdictions.
Conclusion
Any company that wishes to IPO should begin to prepare itself to meet London IPO benchmarks as soon as possible. An IPO will absorb a considerable amount of management time and this should be factored into any decision to seek an IPO. Despite these challenges, the confluence of a regulated market place and a Government currently displaying a positive attitude to gambling augurs well for any iGaming company contemplating London as opposed to other markets for its IPO.