Happy 1st birthday to Ontario’s iGaming market!

Introduction

On April 4, 2023, Ontario’s regulated internet gaming (iGaming) market turned one. To celebrate, the Canadian Gaming Association threw a birthday party. A one-year-old, much like the Ontario iGaming market, is an amorphous blob of unfulfilled potential. And much like a birthday party for a one-year-old, the party is really about the parents and the community around the parents that helped the child survive and grow for its first year, like friends, family, lobbyists, and multi-national gaming organizations.

Whereas most gaming jurisdictions grow up in a single-parent environment, Ontario is unique in that it has two parents, namely the Alcohol and Gaming Commission of Ontario (AGCO), the regulator, and iGaming Ontario (iGO), the government organization responsible for “conducting and managing” gaming in Ontario (more on that later).

There have been numerous articles written about Ontario’s successes and areas for improvement. Those articles generally focus on Ontario “by the numbers” and will be summarized in the section below. This article is written primarily for those with an interest in the legal and regulatory gaming space, and therefore looks at some of the notable developments over the past year in Ontario from a legal and regulatory perspective.

Ontario iGaming Market: By the Numbers

85.3% of Ontarians Playing on Regulated Sites

According to a March 2023 Ipsos survey, 85.3 percent of respondents who engaged in iGaming in Ontario over the past three months did so on regulated sites. Prior to regulation, the only option for regulated gaming was PlayOLG.ca, operated by the Ontario Lottery and Gaming Corporation (an Ontario government agency). PlayOLG.ca launched in 2013 and did not offer sports betting until 2021. It was not able to compete meaningfully against grey market operators.

12 Registered Operators at Launch, 45 last week, 44 Now

On April 4, 2022, the registered Ontario iGaming market launched with 12 operators. At present, 44 operators hosting more than 70 iGaming sites are authorized to operate in Ontario. One operator, Coolbet, exited Ontario on April 3, 2023. Ontario does not have a cap on licenses, so it is expected that market forces will lead to operators choosing to leave the Ontario iGaming market.

Gaming Revenue Increasing

According to quarterly market reports released by iGaming Ontario, total gaming revenue increased from CAD $162 million between April 4, 2022 and June 30, 2022 to CAD $457 million between October 1, 2022 and December 31, 2022. Active player accounts have nearly doubled, going from 492,000 as of June 30, 2022 to 910,000 accounts by December 31, 2022.

At the Ontario iGaming market’s first birthday party, iGO reported approximately CAD $35.6 billion in total wagers and approximately CAD $1.4 billion in gaming revenue. According to iGO, Ontario is now one of North America’s top-five gaming jurisdictions in terms of revenue.

Fantasy Flop

The AGCO has taken the position that fantasy sports are a pay-to-play sports betting product and may only be provided by registered operators. Any registered activity must only be available to players physically located in Ontario. One exception to this requirement is that provinces may share liquidity through an inter-provincial agreement. There are no such agreements in place. As a result, existing daily fantasy sports operators who are registered in Ontario have made a commercial decision to cease this offering. At present, no registered operators offer daily fantasy sports to players in Ontario.

Legal and Regulatory “Highlights”

While the previous section set out the past year’s commercial highlights, this next section will examine select legal and regulatory milestones. These provide insight into the priorities of the AGCO and, in the case of the Mohawk Council of Kahnawà:ke’s application, a legal challenge to the iGaming market’s framework.

Ending the Grey Market Transition Period

“A key objective in this first year has been to move Ontario players from playing on unregulated sites to the regulated market, so that they would benefit from high standards of operator and game integrity, fairness and player protections including responsible gambling safeguards,” Tom Mungham, Registrar and CEO of the AGCO.

One of the key decisions made by regulators in “new” jurisdictions is how to address grey market operators active in a jurisdiction prior to regulation. For example, in the Netherlands, grey market operators were not able to get a licence for the first six months of the regulated Dutch market. Ontario took a different approach, effectively offering a consequence-free grey-market transition period to operators. Grey market operators in Ontario thus had an advantage entering the market, as they already had an existing base of Ontario players.

Prior to October 2022, the Internet Gaming Operator Application Guide (the Guide) contained a section titled “What are the requirements related to exiting the unregulated Ontario market?” This section had key statements that made it clear that one of the early priorities of the AGCO was to encourage grey market operators to apply for Ontario registration such as “facilitating a business-like transition from unregulated to regulated igaming scheme that is fair for registrants,” “we want to ensure a smooth and efficient transition to the regulated igaming scheme for operators,” and to ensure “the transition to the regulated igaming scheme is as seamless as possible – with the goal of having no ‘blackout’ period”.

The AGCO encouraged operators to apply before the April 4, 2022 go-live date by allowing operators who applied for registration before April 4, 2022 to continue grey market activities until issued a registration by the AGCO.

The AGCO’s welcoming treatment of grey market operators accomplished its objective to provide a safe regulatory space for operators to transition from the grey market.

On October 4, 2022, the AGCO determined that enough time had passed for well-intentioned grey market operators to transition to the regulated Ontario market (and likely recieved some pressure from registered operators) and announced that it would be ending the transition period on October 31, 2022 by establishing the following regulatory standard:

1.22 Operators and gaming-related suppliers must cease all unregulated activities if, to carry out those same activities in iGaming Ontario’s regulated online lottery scheme, it would require registration under the GCA.

Operators and gaming-related suppliers shall not enter into any agreements or arrangements with any unregistered person who is providing the operator or gaming-related supplier with any goods or services if, to provide those goods and services in iGaming Ontario’s regulated online lottery scheme, it would require registration under the GCA.

Note: For greater certainty, and without limiting the generality of any other Standard, this Standard applies to and governs applicants.

Therefore, beginning on October 31, 2022, operators applying for registration in Ontario had to stop offering gaming services in Ontario until receiving authorization from the AGCO and iGO to provide gaming services to players located in Ontario.

After October 31, 2022, any operator wishing to transition from the unregulated to the regulated space in Ontario had to (i) block its Ontario based customers from the time of application to the time of obtaining permissions from the AGCO and iGO; and (ii) convince the AGCO that it should be issued a gaming registration despite operating in the unregistered market following the transition date.

Operators who had already applied to the AGCO, including prior to April 4, 2022, and had advanced through the application process, temporarily ceased offering gaming services in Ontario until they received authorization to offer services to players located in Ontario.

Regulatory Sanctions

The AGCO uses monetary penalties as a compliance tool for registrants who have violated the Gaming Control Act, 1992 (the “Act”).

The AGCO released information about four monetary penalties issued to registered iGaming operators in the past year. All four penalties were for advertisement and inducement (bonus) infractions related to the Registrar’s Standards for Internet Gaming (Standards).

In Ontario, there is a blanket prohibition on the public advertisement of bonuses. Operators can offer bonuses on their gaming site, and through direct advertising and marketing, after receiving active player consent.

Operators were fined for the following reasons:

1. Tweeting an advertisement for a $250k launch party where one player would win a $100k casino bonus;
2. Tweeting an advertisement for a $10 casino bonus in return for a $25 bet;
3. Tweeting an advertisement where a user would win 100 free spins for following the operator’s twitter account;
4. Various public transit posters with an inducement to play for free;
5. Various tweets and advertisements offering boosted odds for sports betting; and
6. Various tweets and advertisements promoting “generous welcome offers”.

By adopting a “no nonsense” approach to operators violating Standard 2.05, the AGCO is signaling to the public that responsible gaming is a high priority. The AGCO is also sending a message to operators that there will be financial and reputational consequences to advertising inducements. These fines counter the financial benefit connected to the violation of the standard and (hopefully) deters operators from engaging in a cost-benefit analysis of whether to advertise inducements in contravention of the Standards.

Banning (And Unbanning) Ultimate Fighting Championship (UFC) Bets

On December 1, 2022, the AGCO became the first jurisdiction to establish a blanket provision on UFC betting.

According to a press release provided by the AGCO, the AGCO made its decision “in order to protect the betting public” due to “concerns about non-compliance with AGCO’s betting integrity requirements”. The AGCO’s reasoning for banning UFC bets is that the UFC “does not prohibit all insiders from betting on UFC events”. An insider includes an athlete’s coaches, managers, handlers, trainers, medical professionals, or other persons with access to non-public information. This contravenes the Standards, because certain standards require that (i) rules and codes shall be prescribed and enforced that include prohibitions on betting by insiders; and (ii) there are adequate integrity safeguards in place to mitigate match-fixing and any other activity that may influence the outcome of bet upon events.

In its press release, the AGCO stated that “once necessary remedial steps have been taken, they [operators] may provide information demonstrating that UFC bets or betting products meet the Standards.”

On January 19, 2023 the UFC and U.S. Integrity (a sports-integrity solutions provider) announced a comprehensive agreement for betting monitoring services. The press release specifically mentions addressing the AGCO’s concerns and working with the AGCO to ensure the integrity of the UFC. On that same day, the AGCO reinstated betting on UFC.

The AGCO could have ignored the UFC betting controversy or banned UFC betting, drafted a press release, and moved on. By taking steps to work with the UFC to ensure that the UFC meets standards for reinstatement, the AGCO demonstrated a strong commitment to player protection and betting integrity.

Terminating Association with Companies Operating in the Unregulated Market

A primary objective of the AGCO is to minimize the unregulated Ontario market. By allowing unregistered operators and suppliers to have a transition period, Ontario was able to capture a significant portion of the unregulated Ontario market. However, in one situation, the AGCO attempted to regulate the global activities of its registrants, which led to operator and supplier pushback.

One interesting provision of the previous Guide was the requirement that all applicants “must terminate any association they may have with another company that operates in the unregulated market in Ontario once they are issued a registration from the AGCO”.

Operators and suppliers would have to review their global associations and ensure they were not associating with an unregistered person providing services to the Ontario market. Registered operators and suppliers discovering these associations would either have to convince the unregistered person to cease offering services in Ontario or terminate the agreement between the registrant and the unregistered person. An operator or supplier making its game or platform unavailable to the unregistered market was insufficient to meet this requirement.

This was a challenging ask, both practically (for example, a games provider identifying the parties involved where an aggregator, through its relationship with a games provider, provides the game as part of a game suite to other operators), and commercially (operators have to choose between the AGCO’s request in Ontario and breaking contractual relationships).

Further complicating the situation for registrants was that this “requirement” was in the Guide, but not set out in the Standards. When the Standards were updated in October 2022 to establish the grey market transition period ending on October 31, 2022, the AGCO could have also added a new standard relating to registrants terminating associations with companies operating in the unregistered market. Instead, the new standard focused on the services provided by and relationships of registrants as it related to the services provided by the registrant in Ontario.

The AGCO updated the Guide in October 2022 and replaced the reference to “terminating associations with companies operating in the unregistered Ontario market” with the new Standard (Standard 1.22) that ended the grey market transition period.

Mohawk Council of Kahnawà:ke Sues iGaming Ontario and the Ontario Attorney General

Ontario’s iGaming framework is based on a creative interpretation of the phrase “conduct and manage” in s. 207 of the Canadian Criminal Code (the “Code”).

In the Code, all gaming “on or through a computer” must be conducted and managed by a provincial government. As fellow Canadian and IMGL member Ron Segev writes:

There are a number of indicators that are generally accepted as being relevant to the determination of whether or not the government has conduct and management of the gaming activity.

Those indicators include examining which entity

1. Is responsible for strategic decision-making;
2. Owns the physical infrastructure and intellectual property required to carry on business;
3. Maintains operational control;
4. Controls game selection and rules of play
5. Has control over funds; and
6. Retains a significant portion of the profits.

To comply with its “conduct and manage” obligations under the Code, a new government entity, iGO, was set up to “conduct and manage” gaming. iGO has control of player data, player funds, and various other rights related to gaming in Ontario.

In December 2022, the Mohawk Council of Kahnawá:ke (MCK) filed an Amended Notice of Application for (i) a declaration that the Ontario government does not “conduct and manage” online lottery schemes (iGaming Schemes); (ii) an order quashing the iGaming scheme because it is ultra vires the Ontario government’s authority; and (iii) in the alternative, an order declaring the iGaming scheme inoperative.

MCK has a longstanding interest in gaming and wagering. The Kahnawá:ke Gaming Commission has been regulating gaming from within Canada (on Kahnawá:ke Territory) for over 25 years.

MCK’s position is that online lottery schemes established under the iGaming Scheme are not conducted and managed by the Ontario government because private operators (not the province):

1. Own and operate their own proprietary platforms;
2. Are responsible for key decision-making activities;
3. Are responsible for meeting compliance obligations for their gaming sites;
4. Have authority to retain suppliers in relation to the gaming site; and
5. Are the primary beneficiaries of revenue generated by the iGaming Scheme.

A hearing for MCK’s legal challenge is set for February 2024. If the MCK is successful, the Ontario iGaming market will cease to exist in its current state. If MCK’s challenge is unsuccessful, any provinces who were reluctant to shift from a monopoly model to a quasi-licensing model may have additional comfort that the “conduct and manage” framework set up by Ontario would hold up in the courts.

Blowing out the candles!

The first year of Ontario’s gaming market has been a commercial and regulatory success. From a commercial perspective, 44 operators are registered by the AGCO, which includes a significant portion of what was previously the “grey market”. According to iGO, the province of Ontario is one of the top-five largest North American iGaming jurisdictions.

From a regulatory perspective, the AGCO has successfully facilitated a smooth transition for grey market operators and created commercial and regulatory hurdles for grey market operators applying after the transition period. The AGCO has also demonstrated a commitment to player protection by fining operators who violated advertising standards and prohibiting betting on markets with inadequate integrity oversight. The AGCO showed that it is solution-focused by working with the UFC to establish adequate integrity oversight for UFC betting. In situations where the AGCO may have exceeded its regulatory scope (such as trying to regulate operators’ and suppliers’ global associations), it narrowed its focus on registrants’ Ontario activity.

Legally, Ontario’s iGaming framework is built on a creative interpretation of the phrase “conduct and manage,” as such phrase is used in the Code. The MCK is challenging whether iGaming Ontario truly “conducts and manages” gaming. The result of the challenge could close the Ontario iGaming market or may embolden other provinces to adopt a similar approach.

Ontario’s iGaming market is healthy, growing, and in good stewardship. The results thus far have shown Ontario to be a leader in the North American iGaming market. Let’s hope that Ontario iGaming can avoid the “terrible twos”.

Jack Tadman is Principal at GME Law.

For information contact+1 647 567-1742jack@gmelawyers.com

Thanks to Zack Pearlstein and Will Sarwer-Foner Androsoff for their invaluable assistance with this article.