California's AB 2863 To Regulate Online Poker
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California’s Latest Online Poker Bill (AB 2863) – Answers And Analysis

CA online poker bill analysis
Assemblyman Adam Gray and Assemblyman Reggie Jones-Sawyer are sponsoring the latest legislative attempt to bring regulated online poker to California via AB 2863, introduced on February 19.

The full text of the bill and bill alerts are available here.

You can contact Assemblyman Gray via Twitter here and Assemblyman Jones-Sawyer here.

Below you’ll find a summary of the bill’s key components, an analysis of how AB 2863 fits into California’s online poker landscape, and answers to some commonly asked questions.

Read our analysis of the California online poker market’s revenue potential here.

Lasted updated February 21, 2016.

Responses from stakeholders

AB 2683 – Key components

Revenue stream for racing

Up to $60mm a year would flow from online poker to the racing industry under AB 2863. Here’s how that would work:

  • The $60mm would come from a combination of one-time license fees and ongoing tax revenue. Both license fees and tax rate have yet to be set.
  • The payment is not guaranteed – it’s the “first sixty million dollars” in a given year. So if the combination of total one-time license fees and taxes collected in a given year fell below $60mm, the lower total would form the subsidy.
  • The payment would be split between various aspects of the racing industry in a manner detailed by the bill.

This provision is covered in 19619.8.

Licensing overview

There are two tiers of licensing:

  1. Operators (“eligible entities”): Limited to federally recognized California Indian tribes operating under NIGC facility licenses, authorized card rooms, and groups consisting of a combination of either or both qualifying entities.
  2. Service providers: Everyone from platform providers to marketing affiliates.

The operator tier comes both with a license fee and tax responsibility. Additionally, eligibility for the operator tier is subject to both a suitability review and also to a number of additional conditions (e.g., five years of continuous operation preceding application).

Operator licenses are good for seven years (auto-renews on application, no additional fee assessed). The initial operator licenses are considered “temporary” and are good for up to two years.

The service provider tier does require a suitability check and requires the applicant to cover the costs of the investigation. There are a number of suitability standards spelled out in the bill, and regulators have additional latitude to deny licensure based on other factors.

AB 2863 does not suggest an additional fee (like the one-time fee assessed to operators) or refer to ongoing fees for service providers beyond standard renewals.

Service providers include a broad swath of ancillary participants in the online poker market, including (but not limited to):

  • Software and other technical providers.
  • Anyone who provides “intellectual property, including trademarks, trade names, service marks, or similar intellectual property under which a licensed operator identifies its games to its customers.”
  • Anyone paid a percentage of gaming revenue (except banks / payment processors under certain circumstances).
  • Anyone who “[r]eceives compensation as part of an affiliate marketing program from bringing players or potential players to a licensed operator’s authorized poker Web site.”

See 19990.201(ar) for more.

Interestingly, the bill contains a specific provision that appears aimed at preventing racing interests from serving as operators by proxy via a service provider license:

 An agreement between a licensed operator and a service provider that is a horse racing association operating pursuant to Chapter 4 (commencing with Section 19400) shall ensure that at least 50 percent of the gross gaming revenue that the licensed operator derives from the service provided by the service provider is paid to the service provider.

No obvious “bad actor” clause

A number of suitability standards are laid out in 19990.405.

But AB 2863 lacks a clause that specifically addresses applicants who accepted play from the United States following passage of the UIGEA. That’s the typical brightline deployed in bad actor clauses in past California bills, so it’s broadly fair to say that AB 2863 lacks a bad actor clause.

The California Gaming Control Commission will have additional latitude on the issue of licensure.

Revenue TDB

AB 2863 does not currently contain specific tax rates or license fees. Earlier versions of the draft reportedly featured a one-time license fee of $15mm and a tax rate of 15% of gross gaming revenue.

The one-time license fee will be treated as a credit against taxes owed by the operator.

Gross gaming revenue is defined as “the total amount of moneys paid by players to the operator to participate in authorized games before deducting the cost of operating those activities except for fees to marketing affiliates and payment processing fees.” (19990.201(r)).

Ongoing fees to cover the “reasonable costs of license oversight, consumer protection, state regulation, problem gambling programs, and other purposes related to this chapter” are also required, amounts TDB.

Some percentage of revenue (TBD) will be diverted to “ensuring adequate resources for law enforcement charged with enforcing the prohibitions and protections of this chapter” (19990.802).

What games are allowed?

AB 2863 offers an extensive definition of what does – and doesn’t – constitute poker (19990.201(al)).

The definition is extensive; some key points include:

  • Language that prohibits house-banked games.
  • Language that prohibits third-party banking (player-dealer) of games.
  • Language that seeks to prohibit games of pure chance presented in a poker format (such as auto all-in tournaments).

Regulations

AB 2863 directs the relevant agencies to promulgate specific regulations for online poker within 270 days following bill passage.

The bill does not dive into the nuts-and-bolts of regulation, but rather lays out minimum standards and areas that regulators are compelled to address (e.g., problem gambling, underage gambling, technical standards, and suitability standards). This is the standard modern approach for regulating commercial gaming in the United States.

Odds and ends

  • The bill allows a licensed operator to offer “authorized Internet poker games on up to two authorized poker Web sites pursuant to its license” – basically a maximum of two skins per license (19990.517(f)).
  • Operators can pool liquidity between licensees (19990.517(g)).
  • The bill is written to specifically not apply to play-for-fun (play money) or play-for-free (no rake / fee) games (19990.307).
  • The bill specifically prohibits what would amount to online poker cafes (19990.306).
  • The bill makes it a felony to play on an unlicensed online poker site (19990.303).
  • The earliest that online poker could launch in California is one year after regulators approve regulations. There’s a 270 day window for those regulations to be developed and approved.
  • Minimum age: 21.

Player fund protections

Martin Shapiro covered this one pretty well over at TwoPlusTwo:

The sites will be required to keep player funds segregated from operational funds, and deposited in California financial institutions. However, there are no provisions for protection of those funds. There is nothing in the bill which gives players first-lien on the funds in the case of site bankruptcy; recourse in the case of theft of those funds; etc. The funds will be segregated but not protected. Regulations could be developed to cover this, and other laws may be apply, but this bill itself provides no such protections.

Read the full text of AB 2863 here.

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How AB 2863 fits into broader context of California online poker

AB 2863 comes into the picture as California approaches a decade of attempts to regulate online poker. Those attempts accelerated following online poker’s Black Friday in 2011, but recent years have witnessed the emergence of what amounts to a political deadlock between opposing coalitions with differing visions for regulated online poker.

While there are multiple points of divergence between different stakeholders in California, the two primary sticking points are primarily understood to be:

  1. What role will California’s racing industry play in regulated online poker? Some background on that question here and here.
  2. What approach should an online poker bill take to individuals and entities who offered online poker to Californians prior to the passage of the bill? This issue is often referred to as the “bad actor” debate.

The relative importance of the two issues is a matter of some debate.

One school of thought is that resolving the issue of the racing industry’s involvement will lead to compromise on the second issue, which has arguably receded in importance following PokerStars’ approval by regulators in New Jersey.

But recent commentary regarding the online poker legislative process from a coalition of politically powerful tribes suggested that the “bad actor” issue remains both active and significant.

In any case, the bill represents a sea change in terms of resolving the question of how the racing industry can benefit from online poker. The deal as outlined (up to $60mm annually) is likely to change, but a sober analysis of the regulated online poker market in California strongly argues for the tracks taking any deal that offers a reasonable fraction of $60mm.

Bottom line: The bill represents meaningful progress. That progress must be balanced against the reality that AB 2863 (i) is a work in progress; and (ii) faces a political climate that is complex, largely unmotivated to change the status quo, and fraught with potential points of failure.

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AB 2863 – Frequently asked questions

Read the full text of AB 2863 here.

Who can play?

Individuals able to be geo-located in the state of California who are 21 and over. The bill as written would appear to preclude an individual lacking a social security number from creating an account.

What entities will be allowed to offer online poker under this bill?

Short answer: tribes and card rooms. Long answer, from the bill text:

(A) “Eligible entity” includes both of the following:

(i) A card room that operates pursuant to Chapter 5 (commencing with Section 19800) whose owner or owners have been authorized, subject to oversight by, and in good standing with, the applicable state regulatory authorities.

(ii) A federally recognized California Indian tribe that operates a gaming facility pursuant to a facility license issued in accordance with a tribal gaming ordinance approved by the Chair of the National Indian Gaming Commission and that is eligible to conduct real-money poker at that facility.

(B) An entity identified in this paragraph shall have operated its land-based gaming facility for at least five years immediately preceding its application to secure a license to operate an Internet poker Web site pursuant to this chapter, and shall be in good standing during that time period with the applicable federal, state, and tribal regulatory authorities.

(2) A group consisting of any combination of tribes and card rooms is eligible to jointly apply for a license pursuant to this chapter, through an entity organized under state or federal law, if each entity within the group independently satisfies the requisite eligibility requirements identified in this chapter.

What are the tax rates and license fees outlined by the bill?

Those details are absent from the current version of the bill.

The license fee will be a one-time fee that acts an advance on tax owed.

Who regulates online poker under the bill?

Regulation would be a joint effort between the California Gaming Control Commission and the California Department of Justice (the standard arrangement for oversight of commercial gaming in the state).

Does the bill block PokerStars from participating?

The bill contains a number of broad provisions regarding suitability. And California regulators have other avenues to deny a license. But nothing about the bill on face appears to preclude Amaya from applying for a service provider license.

What’s the soonest that online poker could launch in California following the bill passing?

The bill mandates that operator licenses cannot be issued until “one year after the effective date” of regulations.

So the window for launch is basically date bill passes + time it takes to promulgate and approve regulations (max 270 days) + 1 year.

What happens to offshore sites if this bill passes?

Provisions of current California law arguably expose offshore operators to legal liability. But AB 2863 would add an additional felony offense for offering “any game of poker on the Internet in this state unless that person holds a valid license.”

It’s not entirely clear what the additional enforcement mechanism will be.

With that said, offshore poker operators by and large exited New Jersey following that state’s regulation of online poker.

Will it be illegal for California players to play at unlicensed online poker sites?

It appears so. As the bill currently stands, playing for real money at unlicensed sites would be a felony offense.

What will it take for the bill to pass?

The bill would need the approval of two-thirds of the Assembly to move forward. From there, the bill would need to pass the California Senate and then – assuming the bills don’t require some sort of reconciliation between the Assembly and Senate versions – would head to the Governor’s desk. Stops in multiple legislative committees would dot the path.

California Governor Jerry Brown does not have a stated position on regulated online poker that I’m aware of, but the prevailing thought is that support from key stakeholders like racing and tribal gaming interests will translate into the political support necessary to secure passage into law.

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Image credit: Stas Enso / Shutterstock.com

California's Latest Online Poker Bill (AB 2863) - Answers And Analysis
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- Chris is the publisher of OnlinePokerReport.com. Grove also serves as a consultant to various stakeholders in the regulated market for online gambling in the United States.