[SpeakEasy]

Article posted below. The risk is finally explained at the end of the article. Do you want to be part owner of a potentially illegal business?


A gamble that buys equity in poker

Tuesday August 16, 19:33 pm ET, By William Spain

Net startup to offer card sharks own-as-you-play incentive

CHICAGO (MarketWatch) -- In the increasingly crowded world of Internet gambling, a new poker site is trying woo players by offering them stakes not just in their cards but in the company itself.

PokerShare.com, which opens for business this week, promises to give its gamblers ownership positions that pay quarterly dividends and conventional shares if a public offering takes place.

"There is a big expense in getting players to your site, but the bigger expense is keeping them there," said Lucan Toh, chief executive of the Gibraltar-based startup. "In the economics of online poker, you either had to be in at the start or be a little bit clever."

The company will also offer an array of perks comparable to the loyalty incentives that are popular with online and off-line competitors, such as points toward cash rebates, trips, and merchandise.

But the ownership stake is a novel approach to marketing and customer retention, albeit one that may pose legal perils for U.S.-based players.

It works like this: 40% of the company is owned by a Gibraltar-based trust, with the other 60% held by its partners and principals. Gamblers earn "share points" linked to the length of time they play and the number of pots they contribute to as well as from tournament entry fees. The points are held by the trust, which then distributes dividends each quarter based on the company's overall profit.

Poker stocks

Investors already can bet on some publicly held online poker plays like PartyGaming (PRTY), which rolled out its initial public offering in London at a price of 116 pence and went as high as 180 pence last month. On Tuesday, it closed at 161 pence.

Betonsports.com (BSS), which began as an Internet bookie and recently launched a poker product, is also listed in London. Cryptologic (CRYP), a Canadian company that provides much of the online poker software currently being used, already trades on the Nasdaq.

Although PokerShare player-owners will be entitled to dividends, they won't have shareholder rights in managing the company, nor will they be allowed to trade their stakes, at least not until it goes public.

Precise estimates of the size of the Internet poker market -- or that of the online gambling business as a whole -- are hard to come by, although some observers put it as high as $3 billion.

What is indisputable, though, is that the number of sites and the people using them have mushroomed over the last few years. There are hundreds of sites, serving between 1.5 million and 2 million players a month, according to PokerPulse.com, a tracking site.

Sue Schneider, publisher of Interactive Gaming News and an industry consultant, has watched the recent explosive growth of Internet poker sites and their attempts to build up cadres of steady players.

"It is getting pretty crowded in poker," she said. "They are all looking for ways to set themselves apart."

PokerShare's approach "is a new one for me. It is an interesting model," she said.

Like other poker game operators and casinos, PokerShare generates revenue by taking a "rake," or cut, of each pot.

Players can't lose share points but can become ineligible for dividend distribution if they don't play in that quarter; one hand alone would suffice to keep the share active.

While the number of share points held by players can only increase, as more get with the program the percentage held by each will decrease.

"There will be a dilution," Toh said. "But as more players come in, revenue will increase significantly, which means profits will also increase, so players will end up with smaller pieces of a larger pie."

In addition to Toh, the management includes executives drawn form a variety of fields, including traditional gambling and leisure, derivatives trading, mathematics, chemicals, banking -- even packaged goods. (Toh says he did a short stint marketing laundry detergent for Procter & Gamble.)

Toh said he expects the company to have positive cash flow within three months. In the meantime, PokerShare will prime the dividend pump to make sure player-owners earn a cash distribution from the time the first cards are dealt.

"We will inject a million dollars into the cash pool," Toh said, adding that the dividend money will be replaced as play levels climb.

Jurisdictions

The site will accept bets from players based in the U.S. and give them the same benefits as players who live in jurisdictions where online gambling is permitted.

The company's intention, he said, is to go public on the London Stock Exchange, "probably within a 12-month period."

For now, PokerShare will spend between $5 million and $10 million to promote itself online, through print advertising in enthusiast magazines and via "viral marketing," Toh said.

"Unless you have millions of dollars to spend on marketing, you have to come up with a gimmick, something unique," said Eric Morris, publisher of poker magazine Bluff.

PokerShare has not only done that, he said, but in a business where fly-by-night offshore operations are still common, it is "very legit, very progressive, very forward-thinking."

Regulators and law-enforcement authorities -- at least in the U.S. -- may take a different view. While online gambling is legal and common in many foreign jurisdictions, PokerShare plans to actively market itself here, where the pastime exists in what is still a gray area in legal terms. And while players have never been targeted for prosecution -- and probably couldn't be as a practical matter -- holding an ownership position could be a different issue.

"There is a question as to whether or not there is potential liability for an American who owns an interest," in an online gambling firm, said Anthony Cabot, an attorney at Lewis & Roca in Las Vegas, whose practice deals with electronic gambling.

In theory, a PokerShare player-owner could run afoul of the Illegal Gambling Business Act, which provides for federal penalties for people who own or run wagering businesses in violation of state laws.

That statute has "some fairly broad language," but it was written in 1970 and has never been updated to take into account things like owning shares in a publicly traded, foreign-based company with a business that happens to be in contravention of U.S. law, Cabot said.

Besides, he added, "as far as I know, it has never been applied to a person who holds an interest in a public company or a fractional or marginal share of a private company."