Buying into Gaming: What First-Time Investors Should Address Before Signing an LOI

For private equity sponsors, family offices and strategic acquirers, the gaming sector can offer attractive cash flows and growth opportunities. However, first-time investors often find that the playbook they rely on in other industries does not translate cleanly. In most middle-market deals, a letter of intent (LOI) is a relatively light document that sets price and a few key terms, leaving structure and risk allocation to be worked out during diligence and definitive agreement negotiations.

Gaming deals are different. Gaming licenses and related approvals are often nontransferable, ownership changes can require advance approval, and individual investors, control persons, key executives, vendors and financing sources may be subject to scrutiny. Decisions about structure, timing and risk allocation therefore carry consequences that are difficult to undo. Investors who address these threshold issues before signing an LOI are better positioned to avoid costly renegotiation, delayed closings and failed deals.

Ownership and Investment Structure

Structure is often the first question in a gaming transaction, and it should be answered early. In an asset acquisition, the buyer may be able to select which assets and liabilities it assumes, but key contracts, permits and other rights may not transfer without consents or new approvals. In a stock or equity acquisition, the target entity generally remains intact, which can preserve contracts and operating continuity, but the buyer inherits historical liabilities, and the transaction is still likely to constitute a change of control.

Investors should also consider whether to own the target directly or through a holding company. Holding company structures can facilitate financing, co-investment and future exits, but each additional entity and upstream owner may expand the universe of persons who must be identified, disclosed or reviewed. Sponsors with complex fund structures, multiple limited partners or co-investment vehicles should map their ownership chain before approaching a seller.

Finally, the choice between a minority and control position matters. Minority investors may seek to limit their exposure by structuring governance rights carefully, but board seats, veto rights and information rights can affect how an investor is characterized. Control investors should expect a higher level of scrutiny and plan accordingly.

From a regulatory perspective, the transaction structure should be tested against licensing, qualification and prior-approval requirements before the parties settle on the LOI framework. In many jurisdictions, an asset purchase can require the buyer to obtain new or replacement gaming approvals before operating the business, while an equity acquisition, merger, upstream holding-company transaction or other indirect transfer may be treated as a change of ownership or control requiring regulatory approval before closing.

Regulators also commonly look beyond the immediate buyer to parent entities, holding and intermediary companies, controlling persons, directors, officers, managers, significant owners, financing sources and others with the ability to influence gaming operations. As a result, sponsors should identify early which entities and individuals may need to be licensed, found suitable (financially responsible, appropriate business acumen, sound moral character and reputation, and honest and cooperative), registered, disclosed or investigated and should avoid assuming that a minority position will be passive for regulatory purposes. Even minority investors can trigger scrutiny if they cross ownership thresholds, hold governance or veto rights, appoint directors, control financing or otherwise exercise influence over the licensee.

Although thresholds vary by jurisdiction, license type and ownership structure, investors should expect gaming regulators to focus on both ownership percentage and control indicia. For example:

• Nevada's framework requires advance approval for many transfers of interests in licensed gaming operations and treats transfers above 5 percent differently from certain limited administrative transfers.
• Maryland defines ownership for video lottery purposes by reference to a 5 percent beneficial or proprietary interest.
• North Carolina sports wagering supplier rules use 10 percent and 15 percent disclosure thresholds for certain direct owners and upstream entities.
• Florida's parimutuel and slot-machine statutes use 5 percent prior-approval or reporting concepts for ownership changes and also require prior approval for certain 10 percent transfers in parimutuel permitholders.
• Federal Tribal gaming rules apply a 5 percent threshold in the management contract context for certain publicly traded company interests.

Therefore, the LOI should be drafted with enough flexibility to accommodate the approvals process, including possible restructuring if a regulator requires additional applicants, disclosures, waivers, divestitures or conditions.

Pre-LOI Diligence Priorities

In a typical deal, much of the diligence work begins after the LOI is signed. In gaming transactions, several workstreams should be front-loaded so that the investor can price the deal accurately and propose realistic terms:

• Capitalization Table and Ownership History. Confirm who owns the target, directly and indirectly, including options, warrants, convertible instruments and side arrangements that may affect ownership percentages.
• Existing License and Approval Holders. Identify which entities and individuals currently hold or are covered by approvals, as this informs structure and what must be transferred or replaced.
• Change-of-Control Provisions. Review material contracts, leases, financing documents and vendor agreements for consent requirements, termination rights or payments triggered by the transaction.
• Key Person Dependencies. Assess whether the business relies on founders, executives or other individuals whose continued involvement, approval status or departure could affect value.
• Governance Documents. Examine charters, operating agreements and stockholder agreements for transfer restrictions, rights of first refusal, drag-along and tag-along rights, and redemption provisions.

Gaming Regulatory Diligence Should Be a Stand-Alone Workstream

In addition to ordinary corporate diligence, investors should review the target's:

• gaming licenses
• sports wagering or internet gaming approvals
• vendor registrations
• supplier approvals
• Tribal or commercial gaming arrangements
• management agreements
• internal controls
• responsible gaming policies
• anti-money laundering and Bank Secrecy Act compliance
• cybersecurity, information security and geolocation controls
• advertising and affiliate practices
• disciplinary history
• pending investigations
• notices of violation
• audit findings
• patron disputes and material communications with regulators

The diligence request list should also capture whether any approvals are conditional, temporary, probationary, subject to renewal, dependent on particular individuals remaining in approved positions or tied to specific technology, platform, supplier, management contract or internal control approvals. Investors should generally expect that gaming regulators will need to be notified and involved early in the deal process where the target is licensed under a state gaming regulatory framework.

For entities and individuals who may need to be licensed, it is important to both prepare relevant parties that they will need to undergo criminal and financial background checks and make personal disclosures and assess early on if there are likely to be any suitability concerns. Gaming-related suitability investigations are notoriously thorough and invasive and demand full cooperation and candor. Where the target operates in multiple jurisdictions, the buyer should prepare a matrix identifying each regulator, each required filing and notice requirement, the applicants likely to be reviewed, expected timing, document submission and public hearing requirements, confidentiality treatment, public records exposure, and whether interim authority or temporary approval may be available.

Key LOI Terms to Negotiate Early

Although most LOIs are largely nonbinding, the terms they set often anchor the definitive agreement and regulatory strategy. In gaming deals, investors should give particular attention to the following:

• Exclusivity. Standard 30- to 60-day exclusivity periods may be insufficient. Investors should consider longer periods, extension mechanics tied to diligence milestones or both.
• Regulatory Closing Conditions. The LOI should indicate that receipt of required approvals will be a condition to signing or closing, as applicable, and should frame what constitutes an acceptable approval, including whether conditional approvals, temporary authority, disclosure obligations, divestiture requirements, suitability undertakings or burdensome conditions imposed by regulators will excuse performance.
• Termination Rights and Outside Dates. Outside dates should reflect realistic approval timelines, with automatic extensions if approvals remain pending.
• Reverse Break Fees. Sellers increasingly seek a fee payable by the buyer if the deal fails due to regulatory issues. First-time investors should evaluate whether to accept such a fee, at what size and under what triggers before it becomes an expectation.
• Efforts Covenants. Whether the buyer must use "reasonable best efforts" or a more limited standard to obtain approvals, as well as what remedies or divestitures it must accept, should be considered at this stage.
• Regulatory Submissions and Confidentiality. Parties should anticipate that regulators may request deal documents, ownership information, financing materials, internal control information and background materials and should address cooperation, redactions, confidential treatment, privilege, public records considerations and regulator-facing versions of sensitive documents early.
• Applicant and Information Production Covenants. The LOI should allocate responsibility for identifying applicants and qualifiers, collecting personal history and financial information, obtaining fingerprints and consents where required, coordinating responses to regulator follow-up requests, and keeping filings current if ownership, financing or key-person information changes before closing.
• Financing and Remedy Limitations. If debt financing or seller financing is part of the transaction, the LOI should anticipate restrictions on pledges, security interests, foreclosure, receivership, step-in rights, equity conversion and any other remedy that could result in a lender or creditor obtaining control of a gaming business.

Regulatory and Approval Timeline Considerations

Extended approval timelines affect nearly every aspect of deal mechanics. Where a meaningful gap between signing and closing is expected, investors should consider a deferred closing structure with clearly defined conditions and a realistic outside date.

Financing commitments should be sized and timed to the expected approval period. Commitment letters typically expire, and ticking fees or extension costs can erode returns. Lenders may also have their own requirements tied to the approval process.

Interim operating covenants take on added importance during a long pendency period. Buyers will want protection against value-eroding actions, while sellers will resist restrictions that impede ordinary course operations. Parties must also be careful that interim covenants and integration planning do not give the buyer premature control in a way regulators could view as problematic. Purchase price mechanics, such as locked-box structures, working capital adjustments or ticking fees, should be calibrated to the anticipated timeline.

The applicable approval process depends on the product, jurisdiction and license type. A casino acquisition may require approval from a state gaming commission or control board, and a sports wagering or internet gaming transaction may involve gaming regulators, lottery authorities, technology certification labs, geolocation, platform approvals and supplier approvals. Additionally, Tribal gaming transactions may require analysis of Tribal gaming ordinances, Tribal regulatory approvals, compact requirements, management contract restrictions and, in some cases, National Indian Gaming Commission (NIGC) oversight. Regulators generally retain broad discretion to investigate the buyer's financial stability, integrity, source of funds, criminal and litigation history, tax compliance, business reputation, technology controls, compliance systems and ability to maintain the integrity of gaming operations. Due to the thoroughness of such suitability investigations, expanded timelines should be factored into the deal schedule.

Timing should be treated as a deal-variable, not an administrative afterthought. Some regimes provide specific review periods or provisional authority for particular licenses, but full suitability investigations can take several months or longer, particularly where the buyer is new to gaming, has a complex ownership structure, includes foreign investors, relies on acquisition financing or must coordinate parallel approvals in multiple states. Some jurisdictions may permit temporary, transactional, emergency or administrative approvals in limited circumstances, while others require full approval before closing or before the buyer may participate in operations. The LOI and definitive agreement should therefore allocate responsibility for filings, investigation costs, regulator requests, public disclosures, hearings, remedial conditions, and the consequences of delayed or conditioned approval.

In addition, the approval process is not always limited to written submissions. Depending on the jurisdiction and nature of the transaction, a change of ownership, change of control, transfer of assets, supplier approval or financing-related approval may require one or more public meetings, public comment opportunities, hearings or commission meetings. Buyers, sellers, principals and financing parties should assume that regulators may ask for testimony regarding the transaction structure, source of funds, integrity of the applicants, post-closing operations, community impact, compliance commitments and any conditions proposed by staff. The possibility of public testimony should be factored into the deal calendar, disclosure strategy and preparation of executives, and investors who may need to appear before regulators.

Parties should also expect that regulators may request copies of the transaction documents. Depending on the jurisdiction and application posture, purchase agreements, merger agreements, contribution agreements, financing documents, management agreements, side letters, governance documents, security agreements and ancillary agreements may need to be submitted to a gaming commission, control board, lottery authority, Tribal regulator, the NIGC or staff for review. Confidential treatment and redactions may be available for competitively sensitive, personal or privileged information, but the parties should not assume that commercial terms will remain entirely outside the regulatory record. Drafting teams should therefore coordinate early on privilege, confidentiality, public records issues and the preparation of regulator-facing versions of the deal documents.

Financing Gaming Acquisitions

Financing should be analyzed through the same regulatory lens as ownership. Gaming regulators often scrutinize the source of funds for an acquisition, and lenders may be required to provide information regarding loan terms, collateral, enforcement rights, financial stability and any rights that could permit the lender to influence operations. A conventional secured loan from a regulated financial institution is usually less likely to raise licensing concerns than equity-like financing or debt that carries governance rights, profit participation, conversion features or operational covenants that could be viewed as control. Nevertheless, loan documents should be reviewed for gaming-specific provisions addressing regulatory approvals, transaction reporting, cooperation with filings, confidentiality, enforcement limitations, foreclosure mechanics, reserve or liquidity requirements, and the lender's remedies if a regulator delays, conditions or denies approval.

Many jurisdictions distinguish ordinary commercial lending from ownership or operational control, but that distinction should not be treated as a blanket exemption. For example, Nevada's gaming regulations separately address transfers of ownership, loans, possessory security interests and enforcement of security interests, and certain financing activity from independent financial institutions may be treated differently from financing by owners, affiliates or other non-institutional sources. The key distinction is usually between holding collateral as credit support and exercising control over a licensed gaming business. If a lender may foreclose, acquire equity, appoint a receiver, direct operations or otherwise step into control, additional approvals may be required before those remedies can be exercised.

Common Pitfalls for First-Time Gaming Investors

Several recurring mergers and acquisitions (M&A) mistakes can be avoided with early planning:

• Underestimating Closing Condition Complexity. Approvals may be required from multiple authorities, each with its own process and timeline, including multiparty suitability investigations, and conditions can interact in ways that delay or complicate closing.
• Failing to Address Suitability in Representations. Purchase agreements should include representations and covenants addressing each party's ability to obtain required approvals, the absence of disqualifying matters, and unsuitable affiliated entities and individuals, along with cooperation obligations.
• Mispricing Regulatory Risk. Valuation should account for the probability and cost of delay, potential conditions for approval and the possibility of a failed deal, including the cost of any reverse break fee.
• Overlooking the Investor's Own Ownership Chain. Sponsors may discover late in the process that limited partners, co-investors or affiliates must provide information or undergo review.
• Treating the LOI as a Formality. Leaving critical terms for the definitive agreement can weaken leverage and lead to protracted negotiations.
• Assuming Confidentiality Is Automatic. Transaction documents, ownership information, key-person disclosures and application materials may become subject to regulatory review and, in some jurisdictions, partial public records treatment. Thus, confidentiality planning should begin before the first filing.
• Relying on Single-State Assumptions. Ownership thresholds, institutional investor treatment, temporary approvals, transfer restrictions and document submission rules differ materially across gaming products and jurisdictions, so the regulatory road map should be built jurisdiction by jurisdiction, even when the investor's business thesis is national.

Conclusion

Gaming transactions reward investors who plan early. Ownership structure, front-loaded regulatory diligence, carefully negotiated LOI terms, a realistic approval road map and financing arrangements that preserve regulatory flexibility can make the difference between a smooth closing and a stalled deal. First-time investors should engage experienced M&A and gaming counsel before the LOI is signed to help identify threshold issues, prepare applicants and financing sources for scrutiny, and position the transaction for success.

For more information or questions on these considerations, please contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.