Making the grade

For affiliate marketing businesses with aspirations to enter the regulated US online-gambling markets, the gradual promulgation of regulations throughout the country has brought few surprises.

That’s good news in the sense that market entrants playing the long game can map out their strategies with a fair degree of certainty over whether they qualify for regulatory approval. But for those who are looking for low-hanging fruit, the writing on the wall isn’t entirely encouraging.

Naturally, US online-gambling regulations favour existing US-licensed gambling operations and the barriers to entry are decidedly high.

Nevertheless, there will always be an appetite for capitalising on the resourcefulness of ‘outsiders’ with something to bring to the table, and no gaming-industry vertical delivers more on resourcefulness than affiliate marketing.

Thus the door is open for affiliates with the talent and ingenuity to take on heavyweight competitors and a willingness to meet the stringent demands of highly regulated jurisdictions.

But those who are up to the task still need to consider a number of important issues. (As always, what follows is for informational purposes and shouldn’t be taken as legal advice.)

Take a state-by-state approach
Never mind that the events enabling regulated online gambling (that is, the enactment of UIGEA and the repeal of the ban on sports betting) took place at federal level. All gambling in the US is regulated at state level and each state has its own nuanced regulatory framework.

Notwithstanding interstate compacts (a topic for another article), regulated US-facing online-gambling operations are geared for intrastate commerce and designed to comply with the laws of the individual states in which they operate.

This naturally extends to affiliate marketing. While compliance in multiple jurisdictions may seem like a daunting task, the good news is that most states do not wish to reinvent the wheel when it comes to gaming regulations.

You can reasonably expect that most, if not all, states coming on board with regulated online gambling will adopt a regulatory model that is consistent in many aspects with what other states are doing.

For now, New Jersey is the only state that grants licenses specific to affiliate marketing in the online-gambling space but Pennsylvania may soon join it and other states will likely follow. A starting point for prospective licensees would be a model that adheres to New Jersey standards and is adaptable to comply with the regulations of additional states that eventually grant affiliate licences.

Decide on your business model(s)
The approval process is much more involved, and compliance demands are much higher, for affiliates that participate in revenue-share agreements than for those who employ a CPA model.

New Jersey offers two distinct types of affiliate licences. Those who want to operate on a rev-share basis would need to obtain a service industry enterprise license, with an upfront, non-refundable $5,000 application fee, plus additional fees for processing the application. Due diligence is arduous, with thorough background checks and rigid disclosure-and-reporting requirements.

Additionally, applicants’ high-level employees must obtain individual approval from the Division of Gaming Enforcement (DGE). Affiliates operating on a CPA or flat-rate basis, on the other hand, need only obtain a vendor registration, which involves no fee and much more relaxed reporting-and-disclosure requirements.

It is expected that other states will make a similar distinction between CPA and rev-share affiliates, with Pennsylvania potentially being the next state to adopt the New Jersey model.

A number of factors play into choosing whether CPA or rev share is the way to go. In some instances, the lower barriers to entry make CPA the appropriate choice, although the higher barriers for rev-share approval don’t necessarily make rev share the best route for affiliates who can get over them.

Some of our clients, despite having the resources and wherewithal to obtain rev-share approval, still favor the CPA model.

Clean up your act
US gaming jurisdictions have zero tolerance for so-called bad actors. Here again, New Jersey has set the tone by rejecting affiliate applicants who promote gaming sites that target US players illegally. In short, you will not be approved in New Jersey if you do business with grey- or black-market operators.

The DGE has spelled this out in clear terms in letters addressed to affiliates and has also made it clear that it will hold operators who work with tainted affiliates accountable. Not surprisingly, FanDuel recently warned its sports-book partners that they would be cut off if they promote offshore and/or unlicensed sports-betting sites.

We are consequently advising clients that they will need to cut ties with all offshore operators if they wish to enter the regulated US gambling market.

Leverage relationships with European operators
While partnering with illegal sites could jeopardize your entry into regulated US online gambling markets, engaging with foreign companies who operate in highly regulated jurisdictions could give you a distinct edge in the States.

By having a pre-existing relationship with the likes of William Hill or Paddy Power Betfair – European operators who hold US licenses and have affiliate programs – you have probably laid down some of the groundwork for entering US markets.

Consider, for example, that New Jersey vendor licenses are acquired through the partnering operator, not directly from the DGE. Also consider that these companies already have road maps for operating in compliance with US law and that adhering to their standards probably positions you for US compliance as well.

Have an exit strategy
Despite the remarkable ingenuity of many smaller affiliates, the US affiliate gaming space is – like any maturing market – destined to thin down to a handful of heavyweights and will ultimately fall in the hands of corporations that, in terms of structure and philosophy, resemble the operators themselves.

Smaller affiliates entering the US space should be mindful of this inevitability. Whether the end game is to eat or be eaten, a well-planned exit strategy goes a long way towards avoiding the third option of being chewed up and spat out.

Affiliates must also keep in mind that potential dance partners will fully understand that acquisition costs will go up as the markets mature and that valuations will be based on this certainty.

Engage legal counsel
Given the high compliance standards in US markets, you will inevitably need legal guidance in navigating your way through regulatory approval. Decisions regarding how your business is structured and operated will impact the due diligence process, and legal advice will help you avoid getting tripped up.

It will also guide the overall business plan to better position you for attracting investors. With that I have three points of advice.

First, work with US counsel. Potential US affiliates that are already established in other countries might have adequate counsel in the jurisdictions in which they operate but attorneys experienced in US compliance are much more adept at navigating the US legal system. It also helps having someone on the ground where the approval process is taking place.

Second, work with gaming lawyers. The familiarity argument applies here as well. Gaming lawyers deal with compliance matters on an ongoing basis. Would you ask the person who drafted your will to represent you in a criminal trial?

Finally, don’t wait too long to engage legal counsel. There is a tendency (usually for budgetary reasons) to plan carefully on your own and seek legal advice for the final stretch towards regulatory approval. Engaging counsel early in the process, however, will prevent you from making decisions that retard or derail approval.

Not only is getting it right from the start a more economic approach, you should also consider that certain changes necessary for approval take time. For example, you don’t want the process to be held up by an eleventh-hour transfer of ownership interest.

Start today
The recent repeal of PASPA has dramatically accelerated the adoption of regulated online gambling in the US. Pennsylvania could be presenting opportunities for affiliates in a matter of weeks and other states are getting in line.

At least a dozen states are considering the expansion of gambling in some shape or form, some of which could be adopting new policies in the first quarter of 2019. Successful market entrants are those who are already prepared to jump into emerging markets as they open. Reacting instead of anticipating can be the difference between failure and success.

Mark Balestra is US special counsel, igaming law, for Vancouver-based Segev LLP. Balestra has guided clients in a variety of capacities in the gaming and gambling industry for nearly 20 years.