The Illinois Gaming Board last week upheld the denial of a request submitted by Accel Entertainment which sought to convert a loan into an ownership stake in Gold Rush Gaming.
While casino gaming and sports wagering generate most of the attention in the gambling industry, Illinois is a national leader in video gaming terminals (VGTs). Nearly 8,000 establishments statewide have at least one VGT, with close to 42,000 terminals in operation. In the 2019 gaming expansion bill that also legalized sports wagering, most locations had the option to add a sixth VGT to their establishments — and Accel and Gold Rush are two of the state’s largest VGT operators.
Net terminal income generated from VGTs in Illinois is substantially higher than casino revenue despite the fact that the machines are not allowed in Chicago, per city ordinance. In 2021, the nearly $2.5 billion in net terminal income from VGT play resulted in more than $717.7 million in tax receipts for the state compared to the $1.2 billion in casino revenue that provided $248.7 million in taxes.
The latter figure does not include the $73.7 million in tax receipts generated by sports betting through the first 11 months of 2021, with December’s report yet to be released to the public.
A 2019 loan with significant ramifications
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— Accel Entertainment (@AccelEntertain) January 30, 2022
Accel Entertainment made a $30 million loan to Gold Rush Gaming in July 2019, and counsel Donna Moore claimed the terms of the loan allowed Accel to “convert the debt into equity at any time with no restrictions.” Accel made that conversion request to the Illinois Gaming Board in July 2021, and it was initially rejected by IGB Administrator Marcus Fruchter in December.
In denying the Rule 340(a) request, Fruchter cited an “undue economic concentration.” He pointed out that Accel and Gold Rush ranked first and third, respectively, among statewide terminal operators in terms of market share through October 2021, and second and third in net terminal income generated from their VGTs.
“While the boundaries and contours of ‘undue economic concentration’ under the Video Gaming Act and board rule may merit further definition or refinement, the harmful competitive implications of Accel’s Rule 340(a) request are neither theoretical nor difficult to understand,” Fruchter said. “Indeed, allowing the largest terminal operator by number of locations and VGTs to take an ownership interest in the third-largest terminal operator would undoubtedly facilitate the ‘actual or potential domination of video gaming in Illinois’ that the board is obligated under both the Video Gaming Act and board rule to prevent.”
Fruchter noted Accel is also the respondent in two disciplinary complaints from 2020, and that allowing a potential transfer of ownership with those complaints unresolved would not be in the IGB’s best interest.
But the IGB administrator noted there was a potential legal gray area with his decision. To this end, while the board delegated the authority to grant Rule 340(a) requests to Fruchter in January 2021, that delegation is “silent on the authority to deny such requests.”
Can Rule 340 be applied retroactively?
— Gold Rush Gaming (@GRGamingIL) January 29, 2022
Moore argued that applying Rule 340 retroactively would “unconstitutionally impair Accel’s contract rights,” adding that “regulation cannot affect already vested rights.” She further stated that a restriction on Accel’s status seeking a non-material minority ownership position cannot be done without a hearing.
The Accel counsel noted Fruchter’s acknowledgement regarding powers delegated to him and added that Accel’s market position “has not materially changed since the time of the loan.” If that was a concern, “the board should have raised it at the time of the grant,” Moore added.
Gold Rush counsel Paul Jensen claimed that Accel’s attempt to convert the debt into equity was the first step to what it “hoped would be a larger transaction.” Jensen acknowledged that the two sides discussed such a deal, but no agreement was reached.
He further added that Accel did not copy Gold Rush on the filing of the Rule 340(a) request, and when it became apparent that the IGB would not simply approve the request, Jensen claimed Accel did not need the board’s approval for the conversion.
Jensen said Gold Rush has no interest in having Accel as a minority shareholder. He added that at the time the loan deal was struck, Accel “specifically told Gold Rush that the conversion feature was needed only to provide Accel with ‘collateral protection.'”
Schmadeke steps in with questions before vote
In regard to Moore’s claims about applying Rule 340(a) retroactively, IGB Chairman Charles Schmadeke pointed out that amendments to the request were made after the rule took effect. Moore responded that since the contractual terms of the deal did not change, there should not be any retroactive application of Rule 340(a).
Prior to the vote being taken, Fruchter clarified that the promissory note provided “an option” for Accel to acquire an ownership interest in Gold Rush, not “transfer that ownership interest.” That reasoning is why the board held the position that Accel did not hold any equity in Gold Rush.
After counsel from both sides made their closing statements, the board unanimously decided to uphold Fruchter’s denial of Accel’s Rule 340(a) request by a 4-0 vote.