Focussed on Online Gambling? Don't Forget Regulation!

01.08.2019
Simon Bernholt, Partner at Wiggin | Reading Time: 3 min.
Start-ups focussed on the online gambling sector need to think about more than just their MVP and raising finance. In a highly regulated and very competitive sector, understanding regulation and its impact on commercial models can be the difference between a successful launch, and losing money while committing a criminal offense.

Below are some key questions for start-ups focussed on the online gambling sector.

1.     Are you B2C or B2B?
The first key question concerns your position in the supply chain.

This is crucial from a regulatory perspective, as different regulations apply to business-to-consumer (or B2C) companies, those that contract with end users and take their money, and business-to-business (or B2B) companies, who provide products and/or services to B2C operators.

Although B2B companies are regulated and licensed in some jurisdictions - including in Great Britain, some states in the US, Belgium, Romania and Bulgaria – they typically have a different, and lower, risk profile than B2C operators, who are regulated and licensed in far more jurisdictions.
Identifying your customer is the first key to understanding regulation.   

2.     What's your product or service?
The next key question concerns what you are providing. Is it a product, like software, or a service, like marketing? 

This is important, as jurisdictions have very different views on what should be regulated. For example, online sports betting is legal in Australia, but online gaming is strictly prohibited. Similarly, France permits online sports betting and online poker, but not online casino.
And it's not just products. In some jurisdictions, like Romania and New Jersey, service providers (for example those doing affiliate marketing) need to be registered and/or licensed.

3.     What's your target market?
Talking of different jurisdictions brings us onto the next key question: what's your target market?

The online gambling world is split into regulated markets, where a jurisdiction has introduced legislation and a licensing regime for B2C operators (and possibly suppliers), and unregulated markets, where no such legislation or licensing regime exists.

Regulated markets are typically based on a "point of consumption" model, where the B2C operator obtains a licence in the relevant jurisdiction (sometimes, but not always, using a company incorporated in that jurisdiction) and pays gambling tax in that jurisdiction.

B2C operators typically approach unregulated markets on a "point of supply" basis, obtaining a licence in a well-known licensing hub (e.g. Malta, Gibraltar, the Isle of Man) and operating from, and paying tax in, that jurisdiction. A B2C operator that takes play from unregulated markets will rely on legal arguments around the applicability and enforceability of the law each jurisdiction, and the unregulated markets that a B2C operator targets will depend on its "risk rationale", namely the degree of risk that its stakeholders (officers, shareholders, banks, etc.) are prepared take when compared to the reward.   

B2B companies will have different "risk rationales" to B2C companies.

4.     Where are you based?
Once you've decided your target market, it's important to decide where you will be based.

Tax and regulation are the two key drivers behind the location of personnel working in online gambling, particularly decision makers.

Essentially, where do your people, and especially senior people, need to be located to comply with regulation and to achieve the most tax efficient structure?

5.     What's in your contracts?

The online gambling world has a language all of its own – gross gaming revenue, net gaming revenue, progressive jackpot contributions, applicable gambling taxes, distributors, agents, etc.

Working out your commercial model and translating this into an enforceable agreement is key.

But your commercial model will be affected by regulation, and this aspect of the contract shouldn't be forgotten in the rush to launch.

You need to make sure that you work with appropriate partners, and can enforce against those partners in a reputable court if necessary.

Regulation is at the heart of everything in the online gambling world. Get it right, and you could be the next Playtech, SBTech or 888. Get it wrong, and it could be more than just your investors knocking at the door.