Taxation of Virtual Currencies

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The taxation of virtual currencies has garnered increasing attention, in part due to the princely fortunes some are making from the rapid increase in the price of Bitcoins. Yet, the U.S. IRS has issued little guidance in this area. This is likely to change soon. In May 2013, the GAO issued a report on Virtual Economies and Currencies. In part, the report states:

Transactions within virtual economies or using virtual currencies could produce taxable income in various ways, depending on the facts and circumstances of each transaction. For example, transactions within a "closed-flow" virtual currency system do not produce taxable income because a virtual currency can be used only to purchase virtual goods or services. An example of a closed-flow transaction is the purchase of items to use within an online game. In an "open-flow" system, a taxpayer who receives virtual currency as payment for real goods or services may have earned taxable income since the virtual currency can be exchanged for real goods or services or readily exchanged for government-issued currency, such as U.S. dollars.

More recently, the 2013 National Taxpayer Advocate Annual Report to Congress notes the increasing use of virtual currencies, particularly Bitcoin and that the IRS has yet to issue specific guidance addressing the tax treatment or reporting requirements applicable to virtual currency transactions. The report concludes that IRS-issued guidance would promote tax compliance, particularly among those who want to report virtual currency transactions properly, and it would reduce the risk that users of virtual currencies will face tax consequences that they did not anticipate.

Despite noting that the IRS website suggests that existing guidance covers these transactions, it states that this guidance did not explain when the transactions are sufficiently analogous to be covered by existing rules. Among the remaining questions it identified the following:

1.     When will receiving or using digital currency trigger gains and losses?

2.     When will these gains and losses be taxed as ordinary income or capital gains?

3.     What information reporting, withholding, backup withholding, and recordkeeping requirements apply to digital currency transactions?

4.     When should digital currency holdings be reported on a Report of Foreign Bank and Financial Accounts (FBAR), or Form 8938, Statement of Specified Foreign Financial Assets?

In the interim, our Social Media Team's tax gurus are monitoring the issues.

Does Bitcoin Violate the Stamp Payments Act?

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Based on some recent articles, a number of people have asked whether Bitcoin might be declared illegal under an archaic law known as the "Stamp Payments Act." According to a recent Congressional Research Service report, the answer is .... likely not.

The Stamp Payments Act of 1862 states:
Whoever makes, issues, circulates, or pays out any note, check, memorandum, token, or other obligation for a less sum than $1, intended to circulate as money or to be received or used in lieu of lawful money of the United States, shall be fined under this title or imprisoned not more than six months, or both.
It is questionable whether Bitcoin is an "obligation" and if so who is obligated. It is also not clear whether Bitcoin is a note, check, memorandum or token. The CRS report states:
It does not seem likely that a currency that has no physicality would be held to be covered by  this statute even though it circulates on the internet on a worldwide basis and is used for some payments of less than $1. The language of the statute, "note, check, memorandum, token," seems to contemplate a concrete object rather than a computer file; moreover, a digital currency such as Bitcoin, without a third-party issuer, cannot be said to be an obligation.
Of course, a clever legal mind can always develop a legal argument to the contrary.

One of the more famous cases brought under this act related to the Monongahela Bridge company which issued tickets (worth less than $1) good for one trip over the bridge. The court found that this practice did not violate the act, noting:
these tickets have no resemblance or similitude in shape, design or material, to the coin of the United States, nor to the postage currency, the free and untrammeled circulation of ·which it was the design of the act to advance and protect....They do not contain a promise to pay money, they are not the representatives of money, and therefore cannot be said to circulate, or be intended to circulate as money. Money is the medium of exchange among the people. Its peculiar characteristic is, that it is the one thing acceptable to all men, and in exchange for which they will give any commodity they possess.
Another interesting issue presented is who would be liable. To the extent that a Bitcoin miner "issues" a coin, as long as the price of a coin remains greater the $1, they would not seem to violate the express requirement of the statute that the token be less than $1. Assuming for the sake of argument that the Act did otherwise apply, to the extent that a recipient of a coin uses a partial Bitcoin for a transaction less than $1, then the feds perhaps could go after the user.  But going after users who engage in transactions less than $1 does not seem to be a prudent or effective way to stop Bitcoin use. Assuming the vast majority of the transactions were valued at over $1 it would seem to be a pretty ineffective way to shut down Bitcoin.

If the Federal Government wanted to take action against Bitcoin, it would more likely take action to do so directly through new legislation (or perhaps some other existing legislation) rather than chance an iffy interpretation of an ancient statute that was primarily enacted for another purpose and which might only, at best, provide a basis to go after users in small transactions.

Blurry Lines: Legal and Business Uncertainty in Social Media - Virtual Currency

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All types of businesses are leveraging new and emerging business models around virtual currencies and virtual goods. Check out our video where we discuss the various legal issues that need to be addressed to safely and profitable capitalize on these significant business opportunities:

Social Media & Games: 2013 Year in Review

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2013 was an incredibly active year for social media legal issues. Below are selected highlights on some of the more interesting legal issues that impacted social media, along with links to reference material relating to the topics.

1.
Virtual Currency/Bitcoin

FinCEN Virtual Currency Guidance and Enforcements - FinCEN published legal guidance  on virtual currency making clear that existing regulations regarding money transmitter and anti-money laundering laws apply to certain virtual currency activities. Shortly after issuance of the guidelines, a wave of enforcements shut down non-complying entities. [BLOG]

Congressional Hearings on Virtual Currency - Congressional hearings were surprisingly more friendly and receptive of Bitcoin and other virtual currencies.

2.
Privacy - Guidance and Enforcements

COPPA - The FTC issued new guidance and FAQs for children's online protection due to evolving technology and changes in the way children use and access the Internet, mobile devices and social media.

CA Privacy Law - California passed new privacy laws.

3.
Intellectual Property/Patents

Patents - The number of social media patent filings continued to increase. The America Invents Act (AIA) fully kicked in, providing a greater ability to challenge patents believed to be invalid without going through district court litigation. The Fast Track process to get patents issued more rapidly (often in less than a year) continued.

Ownership of Social Media Accounts and Followers - Despite a number of cases (including ones involving LinkedIn and Twitter) relating to ownership of social media accounts, the law remained murky and fact specific. This uncertainty can be avoided by proper attention to social media policies before issues arise.

4.
Employment Law and Social Media

National Labor Relations Board (NLRB) - The NLRB continued to issue surprising guidance and decisions on social media usage. In many cases, some or all provisions of employers' policies governing the use of social media by employees were found to be unlawful. [BLOG] The NLRB affirmed that workers have the right to discuss work conditions freely without fear of retribution, whether the discussion takes place in the office or on Facebook. But later in the year it actually found some uses of social media for employment (firing) decisions to be okay.

Employer Access to Social Media User Names and Passwords - By year end, 36 states had passed or initiated legislation prohibiting employers from requesting personal social media account information or passwords in connection with employment decisions.

National Conference of State Legislatures Report - Some states have similar legislation to protect students in public colleges and universities.

5.
Online Gaming

First mover states forged forward with online gambling.

·         Nevada - Legalized online poker and granted its first licenses for interactive gaming.

·         New Jersey - In February, passed legislation (signed into law by Governor Chris Christie) allowing on-line wagering. Subject to certain limitations, licensed operators are permitted to offer online versions of a wide variety of games currently permitted in Atlantic City casinos (e.g., roulette, craps, black jack, and slots).

·         Delaware - On October 31, launched what Delaware officials call a "full suite" of internet gambling.

Zynga - In September, Zynga withdrew its bid for a gambling license in Nevada

Federal Gambling Legislation - The prospects for a federal law for online gambling remain elusive.

6.
Mobile Health Applications

FDA Guidance - The Food and Drug Administration (FDA) issued guidance that focused on applications that present a greater risk to patients if they do not work as intended or that cause smartphones or other mobile platforms to impact the functionality or performance of traditional medical devices.

FTC Guidance - The FTC issued guidance in April focusing on truthful advertising and privacy.

7.
Gamblification/Sweepstakes

Florida prohibited gaming promotions in a cause-related marketing campaign (where purchase of a good or service benefits a charitable cause).

Internet Sweepstakes Café Conviction in Florida - Lawyer Kelly Mathis was convicted on 103 of 104 counts related to illegal gambling based on his role in Internet Sweepstakes Cafés in Florida. He faces up to 30 years in prison. CA, OH, SC and other states moved quickly to shut down similar operations.

8.
Equity-based crowd funding legalized in the United States

SEC Rules - In October, the SEC voted unanimously to propose rules under the JOBS Act to loosen the rules and permit companies to offer and sell securities through equity crowd funding.

Note: Equity crowd funding is much like crowd funding, which has been popularized in the United States through sites such as Kickstarter and Indiegogo. The difference is that instead of individuals supporting campaigns through donations, numerous investors are purchasing small stakes in startups or small businesses.

Critics Emerge - Critics of equity crowd funding worry that the industry will be rife with Ponzi schemes or that having too many investors will hurt startups' prospects for future funding.

Pillsbury originally discussed this in a January 2012 client alert and March 2012 Blog Post.

9.
Endorsements

FTC Enforcements on Fake Endorsements - In February, the FTC permanently stopped a fake news website operator that allegedly deceived consumers about acai berry weight loss products. The settlements will yield more than $1.6 million and conclude a sweep against online affiliate marketers and networks. The sites falsely claimed endorsements from ABC, Fox News, CBS, CNN, USA Today and Consumer Reports.

Many companies' understanding of and compliance with the FTC Endorsement Guidelines remains lacking, yet enforcements continue.

10.
Wearable Computing Lawsuit

Google Glass Liability? - In what may be a foreboding development, a California woman received a traffic ticket for wearing Google Glass while driving. Many states have broad distracted-driving laws or bans on certain monitors that may apply to Google Glass and similar wearable computing devices.

Social Media Is The Hot Recruitment Tool

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The Sacramento Bee in an article titled Job Front: Social media are growing recruitment tools reported that "[e]mployers in greater numbers are relying on social media to recruit new talent," according to Jobvite's 2013 Social Recruiting Survey.  The Sacramento Bee noted that the survey "showed about 94 percent of employers either use or plan to use social media to recruit workers."  It also noted that "Pollsters found that social-network giants Facebook, LinkedIn and Twitter remain the most popular tools to recruit talent, but that employers are also using YouTube, Instagram, blogs and other social media to find new employees.  Still, LinkedIn leads the way among those hiring officers polled." 

Additional Resource:  The Sacramento Bee; Jobvite

"Solicitation" In the Era of Social Media Remains Unsettled

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Last month, in KNF&T v. Muller (October 2013), the Massachusetts Superior Court found that a LinkedIn update regarding an employee's new job was not a solicitation of business in violation of her non-competition agreement, which also prohibited solicitation.  In that case, the court denied the former employer's request for a preliminary injunction finding that the former employee's LinkedIn update notifying more than 500 contacts about her new job, including contacts she established during her nearly 8 years with her former employer, was not a an impermissible solicitation.  This was despite the fact that the First Circuit recently held in Corporate Technologies, Inc. v. Harnett (August 2013), that an email blast to former clients announcing an employee's new position constituted solicitation in violation of an employee's non-solicitation agreement.

Notwithstanding the rapidly increasing use of social media, very few courts have addressed the issue of when the use of social media violates a non-solicitation provision.  The case law that has addressed this issue over the past few years focuses on whether the former employee has proactively used social media to encourage former colleagues to come to work for, or encourage former clients to give business to, his or her new employer. 

 For example, in Enhanced Network Solutions Group, Inc. v. Hypersonic Technologies Corp. (June 2011), the Indiana Court of Appeals found that posting an employment opportunity on LinkedIn did not constitute prohibited solicitation.  In that case, two software companies entered into a subcontracting agreement in which ENS, an advanced software engineering company, and Hypersonic, a software modification company, agreed that ENS would acquire certain services from Hypersonic to serve ENS's own clients.  The companies agreed that they would "refrain from soliciting or inducing, or attempting to solicit or induce, any employee of the other party."  During their contractual relationship, Hypersonic posted an open position for an outside sales representative on LinkedIn.  A field representative for ENS saw the posting and was interested.  He reached out to and met with Hypersonic executives and was eventually offered employment, which he accepted.  ENS brought suit against Hypersonic for breach of their agreement.

In determining that there was no unlawful solicitation, the Court of Appeals focused on the fact that the non-solicitation provision lacked a definition of the terms "solicit" and "induce."  Based on the commonly used definitions of these words, the court found that there was no violation because the employee had reached out to Hypersonic.  The court further noted that should ENS have wanted to eliminate the possibility of such conduct, it should have provided a definition of "solicit" in future agreements that clearly specified the kind of activity it wanted to prohibit.

In Invidia, LLC v. DiFonzo (October 2012), a popular hairdresser left her position with a salon to work for a competitor.  The new salon posted on her Facebook page that she was coming to work for it, and the hairdresser became Facebook friends with eight of her former clients.  The Superior Court of Massachusetts (October 2012) held that neither of these actions were solicitations in violation of the hairdresser's agreement with her former salon and denied a motion for preliminary injunction because there was no evidence that she had actually encouraged her former clients to come to her new salon.

Similarly, relying on Enhanced Network Solutions Group and Invidia, the United States District Court for the Eastern District of Oklahoma held that a former employee's public posts on his personal Facebook page did not constitute solicitation of his former co-workers under the terms of his non-solicitation agreement with his former employer in Pre-Paid Legal Services, Inc. v. Cahill (February 2013).  The court found that the former employer did not present evidence demonstrating that the former employee's Facebook posts resulted in the departure of any of his former co-workers, or any evidence showing that the former employee was targeting his former co-workers by posting directly on their walls or through private messages.  The former employee's posts only touted his professional satisfaction with his new employer and their products.

The court further noted that invitations sent to former co-workers to join Twitter were not solicitations under the agreement because the invitations did not request the co-workers to "follow" the former employee, they did not contain any information about the new employer, and they were sent by Twitter, not targeted email blasts by the former employee.

Employers should be mindful of the implications of social media for the protection of their trade secrets and good will and may consider directly addressing the use of social media in their non-competition and non-solicitation agreements with their employees.  And employees should not mistake this case law for a free license to promote their new employment on social media, as these cases are limited to their own discrete set of facts.

Blurry Lines: Legal and Business Uncertainty in Social Media - Event #2: Gamblification

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The intersection of social games and gambling is moving forward at a torrid pace. Yet, there are many blurred lines with respect to the legal boundaries for permissible game mechanics used in social games and online gambling offerings. The use of virtual goods and virtual currency further complicates the analysis. Additionally, some companies are pushing the envelope with various forms of prediction markets and online sweepstakes/contest-based business models. Florida recently adopted new rules to close some perceived loopholes. Will this prompt other states to act as well?

Check out our video:

Fast Track Your Patents

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This video blog series features legal insights and strategies for social media and game companies, presented by Jim Gatto, leader of Pillsbury's Social Media & Games team. This four part video series brings a fresh perspective on intellectual property in social media, social and online gaming, gamification, virtual currency, business method patents and more.

This edition focuses on Fast Track Patents. One of the primary concerns that companies have regarding patent filings is the time it takes to get a patent. Recent changes to the patent laws have created a fast track option to "whisk" your patent through the process. To use this option you must file a petition and pay a fee.

To learn more, watch the video here:

Thank you for watching the video. For a copy of the transcript, click here.

Click here to access our other blog posts that focus on patents.

Continue reading "Fast Track Your Patents" »

Some Firings Based on Social Media Use May Be Okay

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In early November, an administrative law judge of the National Labor Relations Board dismissed a complaint filed against an employer, finding that the employer did not violate the National Labor Relations Act by withdrawing rehire offers from two employees' based on their Facebook conversation.

The two employees worked for a non-profit corporation's teen center.  Shortly after the employees were issued rehire letters, they had a Facebook conversation regarding their work at the teen center.  The conversation included a large amount of profanity as well as statements that the employees would not ask permission to engage in certain activities; would do whatever they wanted with the center's funds; and would generally "raise hell."  Another employee saw the conversation and sent screenshots to the director of the teen center.  Letters rescinding the rehire offers were sent to the employees, citing concerns that they would not follow directions and could endanger the children at the teen center.

As in many recent cases, the administrative law judge found that the employees were engaged in "concerted activity" when expressing disagreement with management's running of the teen center.  The judge noted that the Facebook conversation included discussion of (1) how the employees were treated, (2) the employer's failure to respond to certain employee concerns, and (3) the one employee's demotion. 

However, not every instance of concerted activity is protected.  The judge found that the employer could reasonably and lawfully conclude that the employees' actions were not protected.  The judge noted the employer's arguments (1) that its funding from the government and donors could be impacted by the comments, and (2) that the safety of youth served by the teen center could be jeopardized. 

While not every social media-related firing may be unlawful, employers should still be aware of the NLRB's crackdown on social media policies. 

Join us for the Social Gambling & Gaming Summit!

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Pillsbury attorney, James Gatto, is presenting a session at the Social Gambling & Gaming Summit titled, "Gamblification! Interaction between Social Games and Online Gambling."

Pillsbury is sponsoring the Social Gambling & Gaming Summit, a two-day conference focused on the intersection of casino-style social games, mobile gaming, virtual goods, and the bridge between mainstream and social gambling and gaming. This event unites established industry leaders and developers in free-to-play mobile games and social casino games to discuss the future of real-money gaming, cross-platform integration, game design, and player conversion.

For more information and to register, please visit the event page.

Copyright Protection for User Generated Content in Virtual World Confirmed

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While a legal battle will continue between a Second Life content "consultant" and a school teacher using the online virtual-world creating program as an educational tool, the Southern District of New York made one thing clear last week - user-generated Second Life content is copyrightable.

In FireSabre Consulting LLC v. Sheehy, the Defendant, a teacher in the Rampao Central School District in rural New York, created "Rampao Islands," a school project in the virtual world Second Life in 2006.  That year, she attended a Second Life convention in San Francisco to solicit help for the project.  She met Frederick Fuchs, owner of Plaintiff FireSabre, an education-focused virtual-world content creation company.  Fuchs agreed to help with the project in 2006 and designed "terraforming" content, in which he created a portion of the geography of the "First Three Islands" (islands are pieces of land that one can purchase in Second Life) that made up the class project.  He provided further terraforming services in 2007 for the "Second Three Islands," for which he was paid $5000.  The parties dispute the purpose of the payment - the Plaintiff claims it was a limited license to use the content for that school year and Defendants claim it was either a purchase of the content or a perpetual license to use the content.  Defendants have also raised the work for hire doctrine as an affirmative defense, but did not move for summary judgment on that issue.  

In any event, the relationship between the parties broke down.  In summer 2008, Fuchs deposited 40 screenshots of his work with the US Copyright Office and obtained a Certificate of Registration.  He then informed Defendants that continued use of his content was a copyright violation.  When they refused to remove the content from the in-game Rampao Islands, Fuchs engaged in "self-help" and removed some content himself.  He also sent takedown notices under the DMCA to Linden Lab, the Second Life creator, and succeeded in having additional content removed.

Nonetheless, FireSabre sued Ms. Sheehy and other school district executives, claiming copyright infringement and breach of contract.  Both sides moved for summary judgment - motions that the court rejected.

Plaintiff argued that the terraforming was not copyrightable.  The court disagreed, finding it was "fixed in a tangible medium" because it existed on Linden's servers and was visible in the game for some period of time.  The court also found that it was not transitory, despite the fact that students could alter the content.  "In this regard I see no distinction between the terraforming designs and a drawing created on a chalkboard or a sculpture created out of moldable clay. That someone else could come along and, with or without permission, alter the original piece of art does not mean the art was too transitory to be copyrighted in the first place."

Nonetheless, the court denied Plaintiff's motion for summary judgment because there were questions of fact regarding what, if anything, was copied and whether the copying exceeded the scope of any license.  The court also rejected Defendants' fair use argument, despite the fact that the works were used as part of an educational project.  "Nevertheless, this case does not resemble that of a teacher using an excerpt of a copyrighted work as part of a limited instructional exercise. Rather, as to the Second Three Islands, the allegations more closely resemble misappropriation or conversion."  In fact, the court found that none of the fair use factors favored Defendants.

Thus, the case will continue.  And larger issues can be foreseen.  Content can be sold in-game and, as this case demonstrates, can be transferred outside of the game.  If an outside sale is governed by the agreement between the parties, what is the scope of rights granted for an in-game sale?  Does the first sale doctrine apply?  What can a content generator prevent others from doing?  Can a user alter the creation of another in a way that is sufficiently transformative to allow for unfettered use?  How can one enforce their rights in a game world encompassing millions of users and countless creations?

It's a whole new (virtual) world for copyright law.

Around the Virtual World: October 21-25, 2013

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A weekly wrap up of interesting news about virtual worlds, virtual goods and other social media.



A Senator Raises Privacy Questions About Cross-Device Tracking
Senator Edward J. Markey, Democrat of Massachusetts, said that tracking technologies such as cookies are giving way to more sophisticated methods for monitoring users.

Privacy Compliance: Everything Old is New Again
Privacy regulations are sounding a lot like what compliance officers have had to do since the 2000s for anti-corruption efforts.

Debate Escalates Over Mugshot-Removal Outfits
Google Inc.'s recent programming change, moving people's arrest mugshots much lower in search engine results, makes life harder for companies that charge individuals big bucks to remove their photos.

SoftBank Buys 51% of Finnish Mobile Game Maker for $1.5 Billion
The Japanese telecommunications giant SoftBank agreed to buy a 51 percent stake in the Finnish online game company Supercell for around $1.5 billion.

SEC Proposal Brings Crowdfunded Securities Closer to Reality
The expanded use of crowdfunding as a capital raising tool by start-ups and small businesses is closer to reality with proposed rules the Securities and Exchange Commission approved and put out for public comment.

True Beginnings splits from potential buyer
PlentyofFish Media Inc. has broken off a deal to acquire the assets of True Beginnings LLC's online dating business, citing concerns over the members' privacy.


Patenting Business Methods

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This video blog series features legal insights and strategies for social media and game companies, presented by Jim Gatto, leader of Pillsbury's Social Media & Games team. This four part video series brings a fresh perspective on intellectual property in social media, social and online gaming, gamification, virtual currency, business method patents and more.

Our third video is: "Patent Business Methods"

Watch the video here:

Thank you for watching the video. For a copy of the transcript, click here.

Click here to access our other blog posts that focus on patents.

Money Transmitter Licensing Laws Strike Exemption for Certain Agents

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Connecticut is another state to join in a recent trend to amend the state's money transmitter law to remove an explicit exemption from licensure previously afforded to agents of entities exempt from license under the state's money transmitter laws. In Connecticut, under the amended law, "money transmission" means "engaging in the business of issuing or selling payment instruments or stored value, receiving money or monetary value for current or future transmission or the business of transmitting money or monetary value within the United States or to locations outside the United States by any and all means including, but not limited to, payment instrument, wire, facsimile or electronic transfer." Conn. Gen. Stat. § 36a-596(6), as amended. A person shall be deemed to be engaged in the business of money transmission in Connecticut if such person: (1) has a place of business in Connecticut, (2) receives money or monetary value in Connecticut or from a person located in Connecticut, (3) transmits money or monetary value from a location in Connecticut or to a person located in Connecticut, (4) issues stored value or payment instruments that are sold in Connecticut, or (5) sells stored value or payment instruments in Connecticut. Conn. Gen. Stat. § 36a-597(a), as amended. Kansas' amended law was effective July 1, 2013, and Connecticut's amended law was effective October 1. For more information, read our client alerts entitled Starting July 1, Kansas Money Transmitter Act Requires Licensure for Certain Agents and Effective Oct. 1, Connecticut's Money Transmission Law Requires Certain Agents Be Licensed.

Register for Game Developers Conference 2013!

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Please join us at Game Developers Conference (GDC) Next 2013 (Los Angeles, November 5 - 7).  This conference is a brand new developer event focusing on creating the game experiences of the future, including how we will play games, on what we will play them, and how we will monetize, distribute, market, and share them. Whether you're a designer, programmer, architect, producer, artist, marketer, businessperson or all of the above, GDC Next is vital to making great games and key to unlocking money-making opportunities in the most vibrant new areas of the game industry.

REGISTER NOW!

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