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Online gaming initial public offerings (IPOs) have been all the rage recently. In September, Gibraltar's 888.com (formerly Cassava), advised by Freshfields Bruckhaus Deringer, became the latest online gaming business to confirm its intention to float on the London Stock Exchange (LSE).
The 888.com launch of its 700m-plus IPO came hot on the heels of PartyGaming's 4.6bn July IPO. Like PartyGaming, the world's largest internet gaming group, most of 888.com's profits are generated from the US.
Internet casino operators have sought to list on the LSE in order to help raise their profile and let selling shareholders realise their investments. The surge of deals is reminiscent of the 1990s dotcom boom. But unlike most of the online businesses that debuted then, gaming companies have a trading history and are highly profitable. Last year, for instance, PartyGaming made $350m (199.1m) in after-tax profit. However, IPOs in this sector come with hefty health warnings due to a lack of certainty as to whether online gaming is permitted in some countries, such as the US.
PartyGaming's prospectus contained 27 pages of risk factors, the biggest being the US, where legality remains unclear. PartyGaming does not have a physical presence in the US, but the vast majority of the company's clients reside there.
PartyGaming's prospectus warned that, if the US authorities restricted PartyGaming's online gaming activities, it would have very serious consequences for the group and could result in investors losing all or part of their investments.
The principal legislation governing online gambling in the US is the Federal Wire Act. The US Department of Justice considers it in breach of federal laws. However, in the MasterCard International case in 2002, a federal appellate court ruled that the Wire Act does not ban non-sports internet gambling.
It is no surprise, then, that some investment banks are turning down lucrative opportunities to underwrite IPOs in the gaming sector, but lawyers and bankers who are prepared to gamble on the legality of internet betting in the US could hit the jackpot.