Institutional Investor Ownership Thresholds: More of a Good Thing
March 2010

Newly amended Nevada gaming regulations allow institutional investors to own up to 25 percent of any class of a publicly traded company’s voting securities without having to obtain a license or finding of suitability. On Jan. 21, 2010, the Nevada Gaming Commission (NGC) unanimously adopted amendments to NGC Regulation 16, increasing the maximum thresholds of the beneficial ownership levels that institutional investors are allowed to have and still qualify for a waiver of the intrusive and expensive background investigation and licensing/finding of suitability process. These amendments are generally welcomed as a solution for institutional investors who find themselves holding greater equity ownership interests in Nevada public gaming companies as a result of the many financial restructurings that are occurring in the gaming industry. Other institutional investors may be able to take advantage of these amendments to increase their equity interests in Nevada publicly traded gaming companies given their current historically low stock prices.

Regulatory Requirements

This amended regulation is a significant departure from the existing regulations that require licensing or a finding of suitability for persons beneficially owning more than 10 percent of any class of voting securities and that only allow waivers for institutional investors to acquire up to 15 percent. Pursuant to Nevada Revised Statute (NRS) § 463.643, any person who directly or indirectly acquires beneficial ownership of (a) any voting security of a gaming company registered with the NGC as a publicly traded corporation (PTC) may be required to be found suitable as such; (b) who directly or indirectly acquires more than 5 percent of any class of voting securities of a PTC is required to notify the Nevada State Gaming Control Board (GCB), in writing, within 10 days of knowledge of such acquisition; and (c) who directly or indirectly acquires more than 10 percent of any class of voting securities of a PTC must apply to the NGC for a finding of suitability as such within 30 days after the chairman of the GCB mails such beneficial owner a written notice requiring a finding of suitability application.

In addition, under Nevada gaming law, no preapprovals are required for a shareholder to exceed 5 percent or even 10 percent beneficial ownership in a PTC, as long as such a shareholder does not acquire control of the PTC through such beneficial ownership, since pursuant to Nevada gaming law, no person may acquire control of a PTC without first obtaining approval to do so from the GCB and the NGC. However, pursuant to the regulations of the NGC, if a bona fide institutional investor is required to file an application for a finding of suitability under either of the scenarios set forth in (a) or (c) above—and particularly (c)—under certain circumstances such an institutional investor may apply for and receive a waiver of the finding of suitability requirement.

Institutional Investor Waivers

Pursuant to NGC Regulation 16.430, prior to Jan. 21, 2010, and under certain circumstances, an institutional investor that acquired more than 10 percent, but not more than 15 percent, of any class of a PTC’s voting securities could apply to the NGC for a waiver of the finding of suitability requirement if such an institutional investor held the voting securities for investment purposes only. Now, however, with the Jan. 21, 2010, amendments to NGC Regulation 16.430, an institutional investor is allowed to beneficially own up to and including 25 percent of any class of a PTC’s voting securities and still qualify for the waiver. However, an institutional investor owning more than 20 percent but not more than 25 percent must still be careful to comply with the GCB’s and NGC’s “acquisition of control” approval requirements discussed below.

Also, if an institutional investor was granted a waiver prior to Jan. 21, 2010, that institutional investor could beneficially own more than 15 percent but not more than 19 percent of any class of a PTC’s voting securities, if such additional ownership resulted from a stock repurchase program conducted by the PTC. In addition, under such circumstances and prior to Jan. 21, 2010, an institutional investor in this case was required to reduce its ownership percentage in the PTC to 15 percent or less within one year from the date it received notice that it exceeded the 15 percent threshold, with an extension potentially available from the chairman of the GCB.

However, with the Jan. 21, 2010, amendments to Regulation 16.430, an institutional investor is now allowed to beneficially own more than 25 percent but not more than 29 percent of any class of a PTC’s voting securities if such additional ownership resulted from a stock repurchase program conducted by the PTC. In addition, the requirement of reducing beneficial ownership back down to the usual permissible level was deleted from Regulation 16.430. The only additional requirement still applicable to an institutional investor in such situations is that the institutional investor cannot purchase or otherwise acquire any additional voting securities of the PTC that would result in an increase in its ownership percentage.

An institutional investor will generally be deemed by the GCB and the NGC to hold voting securities for investment purposes if it acquires and holds the voting securities in the ordinary course of business as an institutional investor and not for the purpose of directly or indirectly causing the election of a majority of the members of a PTC’s board of directors; any change in a PTC’s corporate charter, bylaws, management, policies or operations, or those of any of its gaming affiliates; or any other action that the NGC finds to be inconsistent with holding a PTC’s voting securities for investment purposes only. Activities that are not deemed to be inconsistent with holding voting securities for investment purposes only include:

  • voting on all matters voted on by stockholders;
  • making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and
  • such other activities as the NGC may determine to be consistent with such investment intent.

The applicant is required to pay all costs of investigation.
For the purposes of Regulation 16.430, an “institutional investor” is defined as:

(a) a bank as defined in Section 3(a)(6) of the Federal Securities Exchange Act;
(b) an insurance company as defined in Section 2(a)(17) of the Investment Company Act of 1940, as amended;
(c) an investment company registered under Section 8 of the Investment Company Act of 1940, as amended;
(d) an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, as amended;
(e) collective trust funds as defined in Section 3(c)(11) of the Investment Company Act of 1940, amended;
(f) an employee benefit plan or pension fund that is subject to the Employee Retirement Income Security Act of 1974, as amended, excluding an employee benefit plan or pension fund sponsored by a publicly traded corporation registered with the commission;
(g) a state or federal government pension plan;
(h) a group comprised entirely of persons specified in (a) through (g); or
(i) such other persons as the commission may determine for reasons consistent with the policies expressed in NRS 463.0129 and 463.489.

It is understood that the GCB considers as a matter of policy that individuals who are accredited investors with high net worth will most likely also qualify as an “institutional investor” pursuant to subsection (i) above. In addition, to qualify as an institutional investor, a person other than a state or federal pension plan must meet the requirements of a “qualified institutional buyer” as defined in Rule 144A of the Federal Securities Act.

Under prior interpretations and applications of Regulation 16.430, a U.K.-domiciled entity that would for all practical purposes be equivalent to a U.S.-domiciled entity that directly falls within the definition of an “institutional investor” as set forth in NGC Regulation 16.010(14) would nevertheless qualify to be eligible for an institutional investor waiver. (See NGC Regulation 16.010(14)(i).) Likewise, to be eligible for an institutional investor waiver pursuant to NGC Regulation 16.430, a private equity company would either have to fall squarely within one of the classifications set forth in NGC Regulation 16.010(14)(a)-(h) or otherwise be determined by the NGC to be the equivalent of an “institutional investor” for reasons consistent with the policies expressed in NRS §§ 463.0129 and 463.489, pursuant to Regulation 16.010(14)(i).

Acquisitions of Control

Pursuant to NGC Regulation 16.430(7), a waiver granted to an institutional investor does not also include a waiver or exemption from, or constitute an approval of, acquiring control of a PTC pursuant to Regulation 16.200. Prior to Jan. 21, 2010, an institutional investor intending to apply for a waiver was also required to simultaneously apply to the GCB and the NGC for an exemption from the prior approval requirements of Regulation 16.200 only if the proposed acquisition would directly or indirectly give the institutional investor the power to direct, or cause the direction of, the management and policies of the PTC (i.e., “control” of the PTC). However, under the Jan. 21, 2010, amendments to Regulation 16.430, an institutional investor is now required to apply to the GCB and the NGC for an exemption from the prior approval requirements of Regulation 16.200 if, at the time of the making of its waiver application, the institutional investor intends to increase its beneficial ownership to more than 20 percent but not more than 25 percent of any class of voting securities of the PTC. The Jan. 21, 2010, amendments to Regulation 16.430(7) also added the clarifying statement that if, at the time an institutional investor applies to the GCB and the NGC for a waiver, it does not intend to increase its beneficial ownership to more than 20 percent of any class of the voting securities of a PTC, but then subsequently forms the intention to increase its beneficial ownership thereof to more than 20 percent but not more than 25 percent, the institutional investor must apply to the GCB and the NGC at that time for an exemption from the prior acquisition of control approval requirements of Regulation 16.200.

The Application Process

An application for an institutional waiver pursuant to Regulation 16.430 is made by filing GCB Form PTC-1, accompanied by a schedule on GCB Form PTC-430 supporting the application, with the GCB and the NGC. The application fee is $500. Only the institutional investor entity or organization itself—and not any individuals associated therewith or employed thereby—needs to file an application.

The institutional investor waiver is a privilege and not a right. Accordingly, the burden will be on the institutional investor to satisfy the GCB and the NGC that it is suitable to receive the waiver. While institutional investor applicants are required to pay the actual costs incurred by the GCB in processing and investigating the waiver application, these costs are tens of thousands of dollars less than if the institutional investor was required to actually be found suitable as a shareholder or beneficial owner of a PTC.

Nevertheless, an institutional investor waiver application investigation by the GCB is still thorough, complete and fairly invasive. Usually two agents from the GCB’s Corporate Securities Division will spend a couple of days at the main office of the institutional investor applicant. The investigation can be expected to include a detailed review of and inquiry concerning various subject areas and documents that will be listed on an information and document request letter that usually directed to an institutional investor waiver applicant at the start of the investigation. An institutional investor intending to go through the process can be greatly aided by engaging competent Nevada gaming counsel to assist it in applying for and obtaining a waiver.

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