BETFAIR GROUP PLC. (Incorporated under the Companies Acts 1985 to 2006 and registered in England and Wales with registered number )

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1 This document comprises a prospectus relating to Betfair Group plc (the Company ) prepared in accordance with the Prospectus Rules of the Financial Services Authority (the FSA ) made under section 73A of the Financial Services and Markets Act 2000 ( FSMA ). The Prospectus will be made available to the public in accordance with the Prospectus Rules. Application has been made to the FSA for all of the Shares, issued and to be issued, to be admitted to the premium listing segment of the Official List of the FSA and to the London Stock Exchange plc (the London Stock Exchange ) and for all of the Shares to be admitted to trading on the London Stock Exchange s main market for listed securities ( Admission ). Conditional dealings in the Shares are expected to commence on the London Stock Exchange at 8.00 a.m. on 22 October It is expected that Admission will become effective, and that unconditional dealings in the Shares will commence at 8.00 a.m. on 27 October Dealings on the London Stock Exchange before Admission will only be settled if Admission takes place. All dealings before the commencement of unconditional dealings will be on a when issued basis and of no effect if Admission does not take place and such dealings will be at the sole risk of the parties concerned. No application is currently intended to be made for the Shares to be admitted to listing or dealt with on any other exchange. The directors of the Company, whose names appear on page 28 of this document (the Directors ), and the Company accept responsibility for the information contained in this document. To the best of the knowledge of the Directors and the Company (who have taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and contains no omission likely to affect the import of such information. See Risk Factors in Part 1 for a discussion of certain risks and other factors that should be considered prior to any investment in the Shares. BETFAIR GROUP PLC (Incorporated under the Companies Acts 1985 to 2006 and registered in England and Wales with registered number ) 15JAN Offer by the Selling Shareholders of 16,227,462 Shares of 0.1 pence each at an Offer Price of 1,300 pence per Share and admission to the premium listing segment of the Official List and to trading on the London Stock Exchange Joint Sponsors Goldman Sachs International Morgan Stanley & Co. International plc Joint Global Coordinators and Joint Bookrunners Goldman Sachs International Morgan Stanley Securities Limited Co-Lead Managers Barclays Capital Numis Securities Limited ORDINARY SHARE CAPITAL IMMEDIATELY FOLLOWING ADMISSION Issued and fully paid Number Nominal Value 106,935, ,935

2 Each of the Banks, each of which is authorised and regulated in the United Kingdom by the FSA, is acting exclusively for the Company and no one else in connection with the Offer. None of the Banks will regard any other person (whether or not a recipient of this document) as a client in relation to the Offer and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients or for the giving of advice in relation to the Offer or any transaction, matter or arrangement referred to in this document. Apart from the responsibilities and liabilities, if any, which may be imposed on the Banks by FSMA or the regulatory regime established thereunder, each of the Banks accepts no responsibility whatsoever for the contents of this document, including its accuracy, completeness or for any other statement made or purported to be made by it, or on its behalf, in connection with the Company, the Shares or the Offer. Each of the Banks accordingly disclaims all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might otherwise have in respect of this document or any such statement. Notice to overseas shareholders The Shares have not been, and will not be, registered under the US Securities Act and may not be offered or sold within the United States, except to qualified institutional buyers ( QIBs ), as defined in, and in reliance on, the exemption from the registration requirements of the US Securities Act of 1933, as amended (the US Securities Act ) provided in Rule 144A under the US Securities Act ( Rule 144A ) or another exemption from, or in a transaction not subject to, the registration requirements of the US Securities Act. Shares are being offered and sold outside the United States in reliance on Regulation S under the US Securities Act. Prospective investors are hereby notified that the Selling Shareholders may be relying on the exemption from the provisions of Section 5 of the US Securities Act provided by Rule 144A. The Shares have not been and will not be registered under the applicable securities laws of Australia, Canada or Japan. Subject to certain exceptions, the Shares may not be offered or sold in any jurisdiction, or to or for the account or benefit of any national, resident or citizen in Australia, Canada or Japan. This document does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to subscribe for or purchase, any securities other than the Shares or any offer or invitation to sell or issue, or any solicitation of any offer to purchase, such Shares by any person in any circumstances in which such offer or solicitation is unlawful. The Shares have not been recommended by any US federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary is a criminal offence in the United States. The distribution of this document and the offer and sale of the Shares in certain jurisdictions may be restricted by law. No action has been or will be taken by the Company, the Selling Shareholders or the Joint Global Coordinators to permit a public offering of the Shares under the applicable securities laws of any jurisdiction. Other than in the United Kingdom, no action has been taken or will be taken to permit the possession or distribution of this document (or any other offering or publicity materials relating to the Shares) in any jurisdiction where action for that purpose may be required or where doing so is restricted by law. Accordingly, neither this document, nor any advertisement, nor any other offering material may be distributed or published in any jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose possession this document comes should inform themselves about and observe any such restrictions. Any failure to comply with such restrictions may constitute a violation of the securities laws of any such jurisdiction. NOTICE TO NEW HAMPSHIRE RESIDENTS ONLY NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENCE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES ( RSA421-B ) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. Available information For so long as any of the Shares are in issue and are restricted securities within the meaning of Rule 144(a)(3) under the US Securities Act, the Company will, during any period in which it is not subject to Section 13 or 15(d) under the US Securities Exchange Act of 1934 as amended, (the US Exchange Act ), nor exempt from reporting under the US Exchange Act pursuant to Rule 12g3-2(b) thereunder, make available to any holder or beneficial owner of a Share, or to any prospective purchaser of a Share designated by such holder or beneficial owner, the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the US Securities Act upon the written request of such holder or beneficial owner.

3 PART CONTENTS SUMMARY... 2 PART 1 RISK FACTORS... 9 PART 2 PRESENTATION OF FINANCIAL AND OTHER INFORMATION PART 3 DIRECTORS, SECRETARY, REGISTERED AND HEAD OFFICE AND ADVISERS PART 4 EXPECTED TIMETABLE OF PRINCIPAL EVENTS AND OFFER STATISTICS 30 PART 5 INDUSTRY OVERVIEW PART 6 BUSINESS OVERVIEW PART 7 CORE BETFAIR PART 8 OTHER INVESTMENTS AND BETFAIR AUSTRALIA PART 9 REGULATORY OVERVIEW AND RISK MANAGEMENT PART 10 SELECTED FINANCIAL INFORMATION PART 11 OPERATING AND FINANCIAL REVIEW PART 12 FINANCIAL INFORMATION PART 13 THE OFFER PART 14 DIRECTORS, SENIOR MANAGEMENT AND CORPORATE GOVERNANCE. 182 PART 15 ADDITIONAL INFORMATION Incorporation and share capital Articles of Association Directors and Senior Management s interests Directors terms of employment Betfair Share Plans Employees Retirement benefits Underwriting arrangements Banking facilities Subsidiaries, investments and principal establishments Presentation of statistical data and other information Material contracts UK taxation US federal income taxation Litigation Related party transactions Working capital No significant change Consents General Documents available for inspection PART 16 DEFINITIONS AND GLOSSARY PAGE 1

4 SUMMARY This summary must be read as an introduction to this document. Any decision to invest in Shares should be based on consideration by the investor of this document as a whole. Following the implementation of the relevant provisions of the Prospectus Directive (Directive 2003/71/EC) in each Member State of the European Economic Area ( EEA ), civil liability will attach to those persons responsible for this summary in any such Member State, including any translations of this summary, but only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of this document. Where a claim relating to the information contained in this document is brought before a court in a Member State of the EEA, the plaintiff may, under the national legislation of the Member State where the claim is brought, be required to bear the costs of translating this document before legal proceedings are initiated. Information on Betfair Betfair is the world s largest international online sports betting provider and the world s biggest betting community. As at 30 April 2010, Betfair had more than 3 million registered customers worldwide and processed, on average, more than 5 million transactions per day on its Betting Exchange, more than on all European stock exchanges combined. Launched in 2000, Betfair pioneered online person-to-person sports betting by developing a market place through its Betting Exchange, where customers come together in order to bet at odds sought by themselves or offered by other customers, thereby eliminating the need for a traditional bookmaker. The Betting Exchange has been at the forefront of the development of innovative offerings, such as in-play betting, which allows customers to bet while an event is in progress. The Betting Exchange has fundamentally changed the sports betting market by offering customers better pricing and more choice and flexibility. This has resulted in Betfair s customers showing greater levels of loyalty than its competitors with significantly higher satisfaction rates. Betfair is organised into two key segments: Core Betfair and Other Investments : Core Betfair offers a differentiated and diverse portfolio of products to its customers, including the Betting Exchange, other sports betting products, a range of casino games and poker; and Other Investments comprises LMAX and Betfair US, each of which is in an investment phase and both of which the Directors believe offer opportunities for significant future growth. LMAX is a 73.5 per cent. owned subsidiary which has developed an exchange platform for online retail financial trading that has evolved from Betfair s exchange technology. Betfair US comprises TVG, a licensed US horse racing wagering and television broadcasting business, and a development office in San Francisco. In addition, Betfair has a 50 per cent. holding in Betfair Australia, an Australian and New Zealand customer-facing version of the Betting Exchange which is separately managed and supported by local operations. Key investment attractions The Directors believe that Betfair s key investment attractions are: its unique, disruptive Exchange Platform technology; its leadership in the large and growing online sports betting and gaming market; the transformational impact of its Betting Exchange model, which provides customers with better value and more choice and flexibility than competing products; a range of sustainable competitive advantages, including the network effects from its leadership in the betting exchange market; a growing and cash generative business model; and an outstanding management team with a track record of operating within a measured and prudent regulatory approach and investing for long-term growth. 2

5 Growth strategy The Directors believe that Betfair has multiple opportunities to secure future growth in both the short and the long-term through: a continuing focus on extending Betfair s leadership in sports betting, which is the largest segment of online gaming with high levels of forecast growth; further expanding Betfair s portfolio of products and cross-selling these products to Betfair s loyal customer base in order to maximise customers lifetime value; taking advantage of the proliferation and convergence of new channels such as mobile, social media platforms, interactive television and its API; geographic expansion both in the near term in Betfair s core European and Australian markets, and in the longer term through the possibility of liberalisation of large markets such as the USA, India and China; and developing Betfair s technology platform to address new markets and/or new verticals, as Betfair already is seeking to do in the financial markets with LMAX. Consistent with its expansion strategy to date, Betfair will continue to consider the full range of opportunities for acquisition and strategic investment, as well as the organic growth opportunities set out above. Each of these options will continue to be considered on their own merits as a means to help Betfair exploit growth opportunities as the fragmented online betting and gaming market consolidates and develops. Summary financial information Summary segment data The following table shows the Betfair Group s revenue, EBITDA and Adjusted EBITDA for its key segments for the years ended 30 April 2008, 2009 and 2010: For the year ended 30 April millions millions millions Revenue Core Betfair Other Investments Group total Adjusted EBITDA (1) (excluding exceptional items and equity settled share-based payments) Core Betfair Other Investments (4.5) (8.7) Group total EBITDA (1) Core Betfair Other Investments (4.5) (8.7) Group total (1) EBITDA is defined as earnings before interest, tax, depreciation and amortisation and excludes amounts in respect of the Betfair Group s equity accounted investments and is considered by the Directors to be a key measure of its financial performance. 3

6 Summary Group income statement For the year ended 30 April millions millions millions Revenue Cost of sales... (40.1) (48.6) (55.9) Gross profit Administrative expenses... (168.6) (208.1) (266.6) Analysed as: Adjusted EBITDA (1) (excluding exceptional items and equity settled share-based payments) Exceptional items... (0.9) (4.6) Equity settled share-based payments... (4.3) (4.3) (4.2) EBITDA (1) Depreciation and amortisation... (15.8) (20.7) (26.2) Group operating profit Profit before tax Taxation... (13.0) (8.6) (2.7) Profit for the year (1) EBITDA is defined as Earnings Before Interest, Tax, Depreciation and Amortisation and excludes amounts in respect of the Betfair Group s equity accounted investments and is considered by the Betfair Group to be a key measure of its financial performance. Summary Group balance sheet As at 30 April millions millions millions Non-current assets Current assets Total assets Current liabilities... (76.1) (100.8) (114.8) Total liabilities... (76.1) (100.8) (114.8) Total equity Summary Group cash flow statement For the year ended 30 April millions millions millions Net cash from operating activities Net cash used in investing activities... (19.0) (8.0) (37.2) Net cash used in financing activities... (110.8) (35.4) 1.9 Net (decrease)/increase in cash and cash equivalent... (68.9) Cash and cash equivalent at 30 April Current trading and prospects Core Betfair In the first three months of the year ending 30 April 2011 ( FY11 ), Core Betfair s revenue has grown strongly, including a beneficial impact from the 2010 FIFA World Cup. Total Core Betfair revenue increased by 22 per cent. to 87.0 million compared with the first three months of the year ended 30 April 2010 ( FY10 ). 4

7 The total number of active customers grew by 44 per cent. to 526,000 in the quarter, with ARPU falling by 15 per cent. to 164. ARPU from existing cohorts of customers acquired prior to FY11 generally increased, and the fall in ARPU in the period was expected and largely driven by the large number of Recreational Customers acquired in the period reflecting the increasing penetration of Betfair in this segment, (the effect of which was heightened by a high profile event such as the World Cup). High Roller segment During the first quarter of the year, Betfair ran a trial service with a small number of High Roller customers. The size and scale of the betting patterns of these customers is too large to be fully hedged through the Betting Exchange and so Betfair has necessarily accepted proprietary risk on these bets. The trial with High Roller customers proved to be profitable, but the volatility of returns from such customers is such that Betfair has now decided not to proceed with this product offering for the foreseeable future. Revenue from the High Roller segment during the first quarter was approximately 25 million and EBITDA was approximately 7 million. The results will be reported as a separate segment in FY11 and have been excluded from Core Betfair revenue for the quarter stated above. Other Investments In US dollar terms, overall TVG revenue grew by 13 per cent. compared with the first three months of FY10, assisted in part by the ability to offer wagers in Illinois from October LMAX revenue from its Tradefair white label spread betting business was 1.6 million, including 0.9 million of non-recurring income resulting from the volatility of financial markets in the period, compared with 0.6 million in the first three months of FY10. Liquidity The Betfair Group s net cash balances increased to million at 31 July 2010 from million at the end of FY10. Prospects/outlook Overall, Betfair has made a positive start to the year with a strong performance in sports and games and a steady performance in poker. The business is continuing to perform in line with expectations and the Directors view the outlook for the current financial year with confidence. Reasons for the Offer and Admission The Directors believe that the Offer and Admission: will assist Betfair in the development of its international operations through the enhanced transparency and reputational benefits of being a publicly listed company and will therefore enable Betfair to grow more quickly than it could as an unlisted company; will provide Betfair with the flexibility to react to a developing and consolidating online betting and gaming industry; will assist in the incentivisation and retention of key management and employees; and will provide ongoing flexibility and liquidity for existing Shareholders. The Company will bear fees and expenses of an amount up to 11.0 million in connection with Admission and the Offer and will receive no Offer proceeds. The Selling Shareholders will bear up to 3.5 million (assuming exercise of the Over-allotment Option in full) in commissions payable in connection with the Offer and will receive all of the Offer proceeds. Dividend policy The Directors intend to adopt a progressive dividend policy whilst maintaining an appropriate level of dividend cover. This dividend policy will reflect the strong cash flow characteristics and long-term earnings potential of the Betfair Group and will allow it to retain sufficient capital to fund ongoing operating requirements and continued investment for long term growth. It is therefore the Board s current intention 5

8 to target an initial payout ratio of approximately 20 per cent. of profit after tax after adding back losses in the Other Investments segment. The Offer The Offer comprises the sale of up to 16,227,462 Offer Shares by the Selling Shareholders, representing 15.2 per cent. of the Company s issued share capital on Admission. In addition, a further 1,750,322 Over-allotment Shares (representing 1.6 per cent. of the issued share capital of the Company on Admission) are being made available by each of the Core Selling Shareholders pursuant to the Over-allotment Option to cover short positions arising from over-allotments made (if any) in connection with the Offer and any sales made during the stabilisation period. All of the Offer Shares and Over-allotment Shares will be purchased at the Offer Price. Admission is expected to take place and unconditional dealings in the Shares are expected to commence on the London Stock Exchange at 8.00 a.m. on 27 October Prior to Admission, it is expected that dealings in the Shares will commence on a conditional basis on the London Stock Exchange at 8.00 a.m. on 22 October Lock-ups Each of the Directors and the Senior Managers has agreed to enter into a lock-up arrangement whereby each of them has agreed, among other things and subject to certain exceptions, not to offer or sell Shares for a period of 365 days after Admission. Each of the Company and the Core Selling Shareholders has agreed to enter into a lock-up arrangement whereby each of them has agreed, among other things and subject to certain exceptions, not to offer or sell Shares (or, in the case of the Company, issue Shares) for a period of 180 days after Admission. Each of the Core Non-Selling Shareholders has agreed to a similar lock-up arrangement for a period of 180 days. Directors and Senior Management The Directors and Senior Management are: Directors Edward Wray... David Yu... Stephen Morana... Mike McTighe... Ian Dyson... Josh Hannah... Fru Hazlitt... Senior Management Martin Cruddace... Mathias Entenmann... Tony McAlister... Niall Wass... Tony Williams... Non-executive Chairman Chief Executive Officer Chief Financial Officer Senior Independent Director Independent Non-executive Director Non-executive Director Independent Non-executive Director Chief Legal and Regulatory Affairs Officer Chief Product and Services Officer Chief Technology Officer Chief Marketing and Development Officer Group Director, Human Resources 6

9 Risk factors Prior to investing in the Shares, prospective investors should carefully consider the risks associated with the Betfair Group, the industry in which it operates, the Shares and the Offer. Such risks include, but are not limited to, the following: Risks relating to the online betting and gaming industry The regulation and legality of online betting and gaming and varying enforcement The reaction of third party suppliers to the uncertainty regarding the legality of online betting and gaming Attempts by EU Member States to prevent online betting and gaming operators from providing services to customers within their territory Changes to online betting and gaming regulations or their interpretation by regulators Changes to the taxation of online betting and gaming or the imposition of other levies, duties or charges The adequacy of Betfair s access restriction systems Betting and gaming licence compliance, renewal and revocation Clarification of online betting and gaming regulation may restrict Betfair or lead to increased competition Negative publicity about problem and underage betting and gaming and fraud and corruption in sport Risks relating to the operations of Betfair The impact of general economic conditions The scheduling and live broadcasting of major sporting events The effectiveness of Betfair s marketing The availability of payment processing services Money laundering and fraudulent activities by customers or employees Reliance on third parties The importance of Betfair s Heartland Customers The level of liquidity in the Betting Exchange Challenges to the pricing arrangements within the Betfair Group Betfair s ability to successfully develop and launch new products and technologies Network and IT security The failure or disruption of Betfair s technology and advanced information systems Failure to adequately protect customer account information Currency fluctuations Reduced levels of broadband access and Internet penetration Future acquisitions, joint ventures or alliances Challenges in expanding Betfair s customer base in its current markets Challenges in expanding Betfair s customer base in new geographic markets Enhanced competition in Betfair s markets or the development of new technologies or products by Betfair s competitors Protecting intellectual property Allegations of infringement of intellectual property rights by others 7

10 Superior competing claims to funds held in accounts with third party banking institutions Impact of interest rates Deposit taking and financial services regulation Reliance on Senior Management and key individuals Attracting, retaining or motivating highly skilled employees Risks relating to the Offer and the Shares Regulatory requirements affecting shareholders Significant influence of existing shareholders An active trading market for the Shares may not develop or be sustained Market-price volatility Sales of substantial amounts of such Shares in the public markets Shareholders may earn a negative or no return on their investment in Betfair The issue of additional shares in the Company Rights of shareholders outside the United Kingdom 8

11 PART 1 RISK FACTORS Any investment in the Shares is subject to a number of risks. Prior to investing in the Shares, prospective investors should carefully consider the risk factors associated with any investment in the Shares, the Betfair Group s business and the industry in which it operates, together with all other information contained in this document including, in particular, the risk factors described below. The following factors do not purport to be a complete list or explanation of all the risk factors involved in investing in the Shares, and additional risks and uncertainties relating to the Betfair Group that are not currently known to the Company, or that it currently deems immaterial, may also have an adverse effect on the Company s business, financial condition and/or results of operations. If this occurs the price of the Shares may decline and investors could lose all or part of their investment. Investors should consider carefully whether an investment in the Shares is suitable for them in light of the information in this document and their personal circumstances. Risks relating to the online betting and gaming industry The regulation and legality of online betting and gaming varies from jurisdiction to jurisdiction, is subject to uncertainties in many jurisdictions and approaches to enforcement vary from jurisdiction to jurisdiction. The regulation and legality of online betting and gaming varies from jurisdiction to jurisdiction (from open licensing regimes to sanctions or prohibitions) and in certain jurisdictions there is no directly applicable legislation; Betfair derives 2 per cent. or more of its revenue from certain jurisdictions where it does not (and is not currently required to) operate under local licensing regimes, which jurisdictions, in aggregate, contributed approximately 27 per cent. of Betfair Group revenue in FY10 (29 per cent. in FY09). In some jurisdictions online betting and gaming may be illegal. In many jurisdictions, there are conflicting laws and/or regulations, conflicting interpretations, divergent approaches by enforcement agencies and/or inconsistent enforcement policies. Moreover, the legality of online betting and gaming is subject to uncertainties arising from differing approaches among jurisdictions as to the determination of where online betting and gaming activities take place and which authorities have jurisdiction over such activities and/or those who participate in or facilitate them. Betfair s determination as to whether or not to permit customers in a given jurisdiction to access any one or more of Betfair s products and whether or not to engage in different types of marketing activity and customer contact is made on the basis of its measured and prudent approach to regulatory compliance, and is based on a number of factors. These factors include: the terms of Betfair s betting and gaming licences; the laws and regulations of the jurisdiction, in particular, the way in which such laws and regulations apply to the regulation of specific betting and gaming products and specific types of related activity (for example, Betfair has always excluded US residents from its products and, following Betfair s acquisition of TVG, US residents may only access TVG s interstate advanced deposit wagering on horse races, which activity is specifically authorised by US federal law to the extent it complies with relevant US state law); the approach to the application or enforcement of such laws and regulations by regulatory and other authorities, including the approach of such authorities to the extraterritorial application and enforcement of such laws and the willingness or ability (or absence thereof) of such authorities to take enforcement action; state, federal or supra-national law, including EU law if applicable; and any changes to these factors. There is a significant risk that Betfair s assessment of the factors referenced above may not always accurately predict the likelihood of one or more jurisdictions taking enforcement or adverse action against Betfair, its customers or its third party suppliers. Any such action may result in the illegality of the activity undertaken by Betfair, its customers or its third party suppliers being established. If Betfair is found by a court to be acting unlawfully in carrying out marketing activities or accepting bets relating to a Betfair product from customers located in a jurisdiction it may have to desist from doing so, which will have a negative effect on its operations and financial performance. There may also be additional civil, criminal or regulatory proceedings brought against Betfair as a result. Any such proceedings would potentially have cost, resource, and reputational implications, and could potentially have a material 9

12 PART 1 RISK FACTORS adverse effect on the operations, financial performance and prospects of Betfair and on the ability of Betfair to retain, renew or expand its portfolio of licences. Moreover, even if successfully defended, the process may result in Betfair incurring considerable costs and require significant management resource and time. Uncertainty as to the legality of online betting and gaming may deter third party suppliers from dealing with Betfair. Betfair depends on third party suppliers such as payment processing, telecommunications, advertising, technology, banking and other service providers. The willingness of such providers to provide their services to Betfair may be affected by their own assessment of the legality of their provision of services to Betfair, of Betfair s business or of the online betting and gaming sector, and by political or other pressure brought to bear on them. Adverse changes in law or regulation in any jurisdiction may make the provision of key services to Betfair unlawful in such jurisdictions. To the extent that third party suppliers are unwilling or unable to provide services to Betfair, this may have an adverse impact on the operations, financial performance and prospects of Betfair. The introduction of legislation or regulations restricting financial transactions with online betting and gaming operators, other prohibitions or restrictions on the use of credit cards and other banking instruments for online betting and gaming transactions may restrict Betfair s ability to accept payment from its customers. These restrictions may be imposed as a result of concerns related to fraud, payment processing, anti-money laundering or other issues related to the provision of online betting and gaming services. A number of issuing banks or credit card companies may from time to time reject payments to Betfair that are attempted to be made by their customers. Should such restrictions and rejections become more prevalent, or any other restriction on payment processing be introduced, betting and gaming activity by Betfair s customers or the conversion of registered customers into Actives could be adversely affected, which in turn could have a material adverse effect on the operations, financial performance and prospects of Betfair. The introduction of legislation or regulations requiring Internet Service Providers in any jurisdiction to block access to Betfair s websites and products may restrict the ability of Betfair s customers to access products offered by Betfair. Such restrictions, should they be imposed, could have a material adverse effect on the operations, financial performance and prospects of Betfair. There have been and continue to be attempts by various persons in EU Member States to apply domestic criminal and administrative laws to prevent online betting and gaming operators licensed in other Member States from operating in or providing services to customers within their territory; the case law of the European Court of Justice on this issue continues to evolve creating uncertainty for online betting and gaming operators. There have been and continue to be attempts by regulatory authorities, state licensees and monopoly operators in Member States to apply domestic criminal and administrative laws to prevent online betting and gaming operators licensed in other Member States from operating in or providing services to customers within their territory. Betfair permits customers in most Member States to access various services provided by Betfair from its entities licensed in the United Kingdom and Malta. Since 2006 nine Member States have been subject to infringement proceedings initiated by the European Commission in relation to the laws that they apply to online betting and gaming as being contrary to the EU principles of free movement of services, the application and enforcement of these principles by the ECJ, the domestic courts and regulatory authorities in various Member States remains subject to continuing challenge and clarification; there have been, and continue to be outstanding, a considerable number of relevant proceedings before the domestic courts of various Member States and the European Court of Justice. The outcomes of these proceedings remain uncertain and it may take some years before any of these proceedings are finally decided. Whilst the ECJ s decision in Piergiorgio Gambelli and others C-243/01 stated that restrictions on crossborder online betting and gaming services could give rise to restrictions on the freedom to provide services and the freedom of establishment, more recent European Court of Justice jurisprudence has consistently recognised the rights of Member States, subject to certain conditions, to establish or maintain exclusive licensing regimes that exclude operators licensed in other Member States or restrict their marketing activities in that Member State or restrict such operators from passively accepting bets from customers in that Member State. If the jurisprudence of the European Court of Justice continues to recognise that Member States may, subject to certain conditions, restrict the provision of online betting and gaming 10

13 PART 1 RISK FACTORS products by operators licensed in other Member States, which is the trend, then if Member States take action this may adversely affect Betfair s ability to permit customers in a given Member State to access one or more of Betfair s products and to engage in certain types of marketing activity and customer contact. If national courts apply this more restrictive interpretation of EU law, Betfair may have to submit to local licensing, regulation and/or taxation in more Member States than is currently the case and/or desist from accepting bets or carrying out marketing activities in certain Member States. Any such consequences could potentially have a material adverse effect on the operations, financial performance and prospects of Betfair. Adverse changes to the regulation of online betting and gaming or the interpretation thereof by regulators could materially adversely affect the operations, financial performance and prospects of Betfair. Where regulated, the provision of online betting and gaming services is subject to extensive laws, regulations, and where relevant, licensing requirements. These laws, regulations and licensing requirements vary from jurisdiction to jurisdiction but typically address the responsibility, financial standing and probity of owners, directors and operators. Many of these laws, regulations and licensing requirements are recent and are subject to change at any time and relevant regulatory authorities may change their interpretation thereof at any time. Failure to comply with relevant laws, regulations and licensing requirements may lead to penalties, sanctions or ultimately the revocation of relevant operating licences. In addition, the compliance costs associated with these laws, regulations and licensing requirements are significant. Any adverse changes to the regulation of online betting and gaming, the interpretation of these laws, regulations and licensing requirements by relevant regulators or the revocation of operating licences could materially adversely affect the operations, financial performance and prospects of Betfair. Adverse changes to the taxation of online betting and gaming or the imposition of statutory levies or other duties or charges could materially adversely affect the operations, financial performance and prospects of Betfair. The jurisdictions in which Betfair holds licences impose taxes and duties on its licensed activities. Adverse changes to the taxation of online betting and gaming, or the imposition of, or adverse changes to, statutory levies or other duties or charges, for example to help finance sporting events, in the jurisdictions where Betfair holds licences could materially adversely affect the operations, financial performance and prospects of Betfair. Betfair s systems and controls to restrict access to its products may not be adequate. Betfair relies on technological systems and controls to block customers from certain jurisdictions. These systems and controls are intended to ensure that Betfair does not accept bets from customers located in those jurisdictions where it has made a decision not to offer all or certain of its products and services. These systems and controls could fail or otherwise be found to be inadequate, either currently or as a result of future technological developments. This may result in violations of applicable laws or regulations. Any claims in respect of any such violations could have cost, resource, and, in particular if successful, reputational implications, as well as implications on the ability of Betfair to retain, renew or expand its portfolio of licences, and so have a material adverse effect on the operations, financial performance and prospects of Betfair. Betfair faces the risk of loss, revocation, non-renewal or change in the terms of its betting and gaming licences. Betfair s betting and gaming licences may not be renewed or may be revoked. Such revocation or non-renewal may materially adversely affect the operations, financial performance and prospects of Betfair. In particular, Betfair s UK, Maltese and Oregon licences are of key importance to Betfair s operations. In addition, the revocation or non-renewal of these betting and gaming licences or any other licence which may become material to Betfair may lead to adverse publicity and could adversely impact upon Betfair s ability to successfully maintain current licences, apply for future licences in jurisdictions where Betfair currently has a licence or jurisdictions in which Betfair may seek licences in the future. The occurrence of any of these events could result in reputational damage to Betfair, may cause Betfair s other licences to be subject to review or revocation and could materially adversely affect the operations, financial performance and prospects of Betfair. The revocation or non-renewal of Betfair s licences may arise as a result of the failure by Betfair s Directors, management, Shareholders or other investors to 11

14 PART 1 RISK FACTORS adequately comply with the suitability, information reporting or other requirements of licensing and regulatory authorities. For further details regarding the specific risks concerning such requirements, please refer to the Risk Factor below entitled Shareholders may be required to dispose of their Shares as a result of regulatory requirements. Moreover, renewal of Betfair s licences may be on terms that are less favourable to Betfair, which could have a material adverse effect on the operations, financial performance and prospects of Betfair. The clarification of the regulation of online betting and gaming may restrict Betfair s ability to continue to derive revenue from its existing markets and may lead to increased competition. Certain countries whose laws currently prohibit or restrict online betting and gaming or the marketing of those services or protect monopoly providers of betting and gaming services may implement changes to open their markets through the adoption of competitive licensing and regulatory frameworks. Whilst these changes may provide growth opportunities for Betfair, a new licensing and regulatory regime adopted in any such country may impose onerous conditions, such as particular licensing requirements, together with enforcement sanctions for breach thereof, taxation liabilities that make the market unattractive to Betfair, or impose restrictions that limit Betfair s ability to offer certain of its key products or to market its products in the way it would wish to do so. For example, Betfair decided in April 2010 not to seek a licence in France because of certain onerous provisions of the licensing regime and, in addition, chose to block customers in France from using its services. Consequently, Betfair expects that any revenue attributable to its customers in France in FY10 will not recur in future periods. Moreover, the opening of new markets, and the clarification of restrictions surrounding online betting and gaming in other markets where the legal position is currently unclear, may encourage new entrants to the online betting and gaming sector or strengthen the position of existing betting and gaming operators. A significant increase in competition may have a material adverse effect on Betfair s operations, financial performance and prospects. Negative publicity about problem and underage betting and gaming, fraud and corruption in sport may adversely affect Betfair s reputation and business. Negative publicity about problem betting and gaming, underage betting and gaming, fraud (including money laundering) and corruption in sport (including collusion and match-fixing), even if not directly or indirectly connected with Betfair or its products, may adversely impact the reputation of Betfair and the willingness of the public to participate in betting and gaming or a particular form of betting or gaming. As a result, the number of potential customers available to Betfair could be adversely affected. The occurrence of any of these could materially adversely affect the operations, financial performance and prospects of Betfair. Risks relating to the operations of Betfair The worsening of general economic conditions could significantly affect Betfair s customer activity levels. Betfair relies on its customers having sufficient disposable income or capital to spend on betting and gaming. In those jurisdictions most severely affected by it, the recent economic downturn adversely impacted customer activity levels and the size of customer deposits. The worsening of general economic conditions could significantly affect Betfair s customer activity levels and could therefore materially adversely affect the operations, financial performance and prospects of Betfair. Betfair s business, financial condition and results of operations depend on the scheduling and live broadcasting of major sporting events. Betfair s business, financial condition and results of operations are affected by the scheduling and live broadcasting of major sporting events. In particular, a significant portion of Betfair s revenue is derived from betting on horse racing and football including in-play betting. Disruptions to the scheduling and broadcasting of those sports may have a material impact on Betfair s results of operations. In some instances, the scheduling of major sporting events occurs seasonally (for example, UK horse racing and football) or at regular but infrequent intervals (for example, the FIFA World Cup). The cancellation, postponement or curtailment of significant sporting events, for example due to adverse weather conditions, terrorist acts, other acts of war or hostility or the outbreak of infectious diseases (such as foot and mouth 12

15 PART 1 RISK FACTORS disease), or cancellation, disruption to, or postponement of the live broadcasting of such sporting events, for example due to contractual disputes, technological or communication problems, or the insolvency of a major broadcaster, could materially adversely affect the operations, financial performance and prospects of Betfair. The success of Betfair depends on maintaining, developing and enhancing its brand. As the online betting and gaming industry becomes increasingly competitive, the success of Betfair depends on the maintenance, development and enhancement of the Betfair brand. If Betfair is unable to maintain, develop and enhance its brand, its ability to implement its strategic goals may be adversely affected. As a result, Betfair s operating results would be adversely affected. In addition, increased competition may require more management time and resource and greater levels of expenditure to maintain, develop and enhance the Betfair brand, which may have a material adverse effect on Betfair s operations, financial performance and prospects. The success of Betfair depends on the effectiveness of its marketing. Customer acquisition and retention, and therefore Betfair s business, financial condition and results of operations, depend significantly upon the effectiveness of its marketing activities. There are limitations to and, in some cases, prohibitions on the online and offline marketing channels available to Betfair as a result of applicable law and regulation. Further restrictions, or the loss of marketing channels that are currently available, may have a material adverse effect on Betfair s operations, financial performance and prospects. In addition, ineffective and/or inefficient marketing activity undertaken by Betfair, including, in particular, the wasted costs and missed opportunities associated therewith, may also have a material adverse effect on the operations, financial performance and prospects of Betfair. Betfair depends on payment processing for the success of its business. The provision of convenient, trusted, fast and effective payment processing services to Betfair s customers and potential customers is critical to Betfair s business. If there is any deterioration in the quality of the payment processing services provided to Betfair s customers or any interruption to those services, or if such services are only available at an increased cost to Betfair or its customers or terminated and no timely and comparable replacement services are found, Betfair s customers and potential customers may be deterred from using Betfair s products. Any of these occurrences may have a material adverse effect on Betfair s operations, financial performance and prospects. Betfair may fail to detect money laundering and fraudulent activities of customers or employees. Online transactions may be subject to sophisticated schemes or collusion to defraud, launder money or other illegal activities, and there is a risk that Betfair s products or systems may be used for those purposes either by Betfair s customers or employees. Whilst Betfair makes continuing efforts to protect itself and its customers from such activities, including anti-money laundering procedures and protection from fictitious transactions and collusion, the controls and procedures Betfair has implemented may not be effective in all cases. Failure to protect itself and its customers from fraudulent activity either by customers or employees could result in reputational damage to Betfair and could materially adversely affect Betfair s operations, financial performance and prospects. In addition, failure to adequately monitor and prevent money laundering and other fraudulent activity could result in civil or criminal liability for Betfair. Betfair depends on a number of third parties for the operation of its business. Betfair has key contractual relationships with a number of third parties including suppliers, insurers, partners, banks and payment processors. In particular, Betfair relies on key suppliers in order to carry on its operations. The failure of one or more of these third parties may have an adverse impact on the financial and operational performance of Betfair. Similarly, the failure of one or more of these third parties to fulfil its obligations to Betfair for any other reason may also cause significant disruption and have a material adverse effect on its operations, financial performance and prospects. 13

16 PART 1 RISK FACTORS A significant portion of Betfair s revenue is derived from Betfair s Heartland Customers. Betfair s Heartland Customers (as described in Part C of Part 7 Core Betfair ) represent a minority of Betfair s total customer base but generate, collectively, a significant proportion of Betfair s net gaming revenues. Whilst no single Heartland Customer generates more than one per cent. of Betfair s revenues, if macroeconomic factors, licensing, regulatory or tax reasons or other factors outside Betfair s control as more particularly described in this Part I Risk Factors were to result in a significant number of these Heartland Customers ceasing to use (or reducing the levels of their use of) Betfair s products, this may have a material adverse effect on the operations, financial performance and prospects of Betfair. The success of the Betting Exchange depends upon maintaining liquidity. Betfair s Betting Exchange product operates with, and its success is dependent on, high levels of liquidity and a significant proportion of this liquidity is created by transactions generated by Betfair s Heartland Customers. A significant reduction of this liquidity could have a material adverse impact on the attractiveness of Betfair s key products as well as eroding one of its key competitive strengths. The occurrence of any of the risks relating to the operations of Betfair and/or those relating to the online betting and gaming industry may have an adverse impact on liquidity levels on the Betting Exchange, which in turn may have a material adverse effect on Betfair s operations, financial performance and prospects. Risk of challenges to the pricing of arrangements within the Betfair Group. It is Betfair s policy that any pricing of arrangements between members of the Betfair Group, such as the intra-group provision of services, is carried out on an arm s length basis. However, if the tax authorities in the relevant jurisdictions do not regard these arrangements as being made at arm s length and successfully challenge those arrangements, the amount of tax payable by the relevant member of the Betfair Group may increase materially. The development and launch of new products or new technologies may not be achieved in a timely manner or at all and such products or technologies may not be successful. Betfair s success to date has, to a large extent, been driven by its ability consistently to develop and launch new customer products and new and innovative technologies. There can be no certainty that Betfair will continue to be able to develop its technology to keep up-to-date with developments across the online betting and gaming sector and, in particular, to launch such products or new technologies in a timely manner or at all. In addition, there can be no certainty that such products will be popular with customers or that such products or new technologies will be reliable, robust and not susceptible to viruses or failure. Any of these factors could have a material adverse effect on Betfair s operations, financial performance and prospects. Betfair depends on technology and advanced information systems, which may fail or be subject to disruption. The integrity, reliability and operational performance of Betfair s IT systems are critical to Betfair s operations. Betfair s IT systems may be damaged or interrupted by increases in usage, human error, unauthorised access, natural hazards or disasters or similarly disruptive events. Furthermore, Betfair s current systems may be unable to support a significant increase in online traffic or increased customer numbers, whether as a result of organic or inorganic growth of the business. Any failure of Betfair s IT infrastructure or the telecommunications and/or other third party infrastructure on which such infrastructure relies (for example, in Malta) could lead to significant costs and disruptions that could reduce revenue, harm the Company s business reputation and have a material adverse effect on the operations, financial performance and prospects of Betfair. Betfair has in place business continuity procedures, disaster recovery systems and security measures to protect against network or IT failure or disruption. However, those procedures and measures may not be effective to ensure that Betfair is able to carry on its business in the ordinary course if they fail or are disrupted, and they may not ensure Betfair can anticipate, prevent or mitigate a material adverse effect on Betfair s operations, financial performance and prospects resulting from such failure or disruption. In addition, Betfair s controls may not be effective in detecting any intrusion or other security breaches, or safeguarding against sabotage, hackers, viruses and cyber crime, and Betfair has experienced a limited number of security breaches in the past (which have not had a significant effect on Betfair s reputation, 14

17 PART 1 RISK FACTORS operations, financial performance and prospects and in respect of which remedial action has been taken). Any failure in these protections could harm the Company s business reputation and have a material adverse effect on the operations, financial performance and prospects of Betfair. Significant resources may be required to protect Betfair against network failure and disruption. Betfair may at any time be required to expend significant capital or other resources (including staff and management time and resources) to protect Betfair against network or IT failure or disruption or unauthorised access, including the replacement or upgrading of its existing business continuity systems, procedures and security measures. If replacements, expansions, upgrades and/or other maintenance are not implemented successfully or completed efficiently or there are operational failures, the quality of Betfair s product portfolio and service experienced by its customers will be adversely impacted. If, as a result, customers were to reduce or stop their use of Betfair s products and services, this could have a material adverse effect on Betfair s operations, financial performance and prospects. Failure to adequately protect customer account information could have a material adverse effect on Betfair. Betfair processes personal customer data (including name, address, age, bank details and betting and gaming history) as part of its business and therefore must comply with strict data protection and privacy laws in the EU and certain other jurisdictions from which Betfair accepts bets. Those laws restrict Betfair s ability to collect and use personal information relating to customers and potential customers. Notwithstanding Betfair s IT and data security and other systems, it has experienced a limited number of security breaches in the past (which have not had a significant effect on Betfair s reputation, operations, financial performance and prospects and in respect of which remedial action has been taken). Betfair is exposed to the risk that personal data could in the future be wrongfully accessed and/or used, whether by employees, customers or other third parties, or otherwise lost or disclosed or processed in breach of data protection regulation. If Betfair or any of the third party service providers on which it relies fails to transmit customer information and payment details online in a secure manner or if any such theft or loss of personal customer data were otherwise to occur, Betfair could face liability under data protection laws. This could also result in the loss of the goodwill of its customers and deter new customers. Each of these factors could harm the Company s business reputation and have a material adverse effect on Betfair s operations, financial performance and prospects. Betfair is exposed to currency fluctuations. Betfair s reporting currency is sterling but a substantial proportion of Betfair s revenue is earned in other currencies, including the euro and US dollar. Accordingly, the strengthening of any of those currencies or other currencies in which Betfair incurs expenditure against sterling has (and has historically had) a detrimental effect on Betfair s results of operations and financial condition to the extent that Betfair s non-sterling expenditure has exceeded its non-sterling revenue. See Part 11 Operating and Financial Review. The results for operating entities of Betfair whose functional currency is not sterling have been translated into sterling at the applicable foreign currency exchange rates for inclusion in Betfair s historical consolidated financial statements. The exchange rates between relevant currencies other than sterling and sterling have historically fluctuated (including over the last three years), and the translation effect of such fluctuations may have a material adverse effect on Betfair s operations, financial performance and prospects. Betfair may, from time to time, hedge a portion of its currency exposures and requirements to try to limit any adverse effect of exchange rate fluctuations on Betfair s operations, financial performance and prospects, but there can be no assurance that such hedging will eliminate the potentially material adverse effect of such fluctuations. Betfair may be adversely impacted by reduced levels of broadband access and Internet penetration. Broadband access and Internet penetration may be negatively affected by various factors, including the introduction of new media or communications channels or the growth of existing alternative channels (such as mobile and television). In addition, broadband access and Internet penetration may be adversely affected by difficult global economic conditions or the cancellation of government programmes to expand 15

18 PART 1 RISK FACTORS broadband access, as occurred in the United Kingdom. There is a significant risk that a reduction in the growth of, or a decline in, broadband access and Internet penetration, could materially adversely affect Betfair s operations, financial performance and prospects. Betfair may be unsuccessful if it undertakes future acquisitions, joint ventures or alliances. Betfair may seek to acquire or invest in other businesses if appropriate opportunities become available. Any future acquisition may pose regulatory, antitrust and other risks, as well as integration risks. Any of these factors may significantly affect the benefit or anticipated benefit of such acquisitions or investments and consequently the Betfair Group s results or operations. Furthermore, any new acquisitions will require significant time and resources of management and may require the diversion of resources from other activities. Betfair may be unable to manage future acquisitions profitably or to integrate such acquisitions successfully without substantial costs, delays or other problems. In addition, any companies or businesses acquired or invested in may not achieve levels of profitability or revenue that justify the original investment made by Betfair. Betfair s efforts to expand its customer base in those markets from which it generates revenue may not be successful. Betfair s efforts to expand its customer base in those markets from which it generates revenue may not be successful. Betfair intends to expand its customer base by seeking new licences where available and appropriate, improving its product offering for customers, and increasing its marketing activities where possible. However, such efforts may not be successful, potentially resulting in a material adverse effect on Betfair s operations, financial performance and prospects. Betfair s efforts to expand its customer base in new geographic markets may not be successful. As a result of social, political and legal differences between jurisdictions, successful marketing in a new jurisdiction often involves local adaptations to Betfair s overall marketing strategy. While Betfair has been successful in entering new geographic markets to date, future entry into new geographic markets may not be successful. In particular, Betfair s marketing strategy in new geographic markets may not be well received by target customers or may not otherwise be socially acceptable in that jurisdiction. Betfair may be unable to successfully deal with a new and different local operating environment and may be subject to unfamiliar restrictive local laws and regulations which may include specific technological requirements that are incompatible with Betfair s technology or business model. Betfair may also face local state monopolies or other local vested interests that oppose the entry of new operators or already have substantial local market share. Betfair may be unable to secure new licences on acceptable terms where required in order to access customers in any given jurisdiction. Each of these could have a material adverse effect on Betfair s operations, financial performance and prospects. Betfair is exposed to the risk of competition. If Betfair is unable to compete effectively it may lose customers and may not be able to attract new customers. The online betting and gaming industry is increasingly competitive and Betfair may be unable to predict, or adequately plan for, the strategies of its competitors. Betfair may be unable to respond quickly or adequately to the changes in the industry brought on by new products and technologies, the availability of products on other technology platforms and marketing channels, the introduction of new website features and functionality or new marketing and promotional efforts by Betfair s competitors or new competitors and new technology. Betfair also expects to be subject to continual challenges from new and existing competitors who may have larger customer bases and greater brand recognition. In addition, Betfair is at risk from consolidation in the industry which might lead to the appearance of a very large competitor to whom Betfair might lose market share. Other competitors may have significantly greater financial, technical, marketing and other resources than Betfair and may be able to secure greater liquidity than Betfair. A loss of market share and, in particular, a loss of liquidity on the Betting Exchange could have a considerable adverse effect on Betfair s business. Furthermore, Betfair s competitors may be established in a country or market prior to Betfair s entry, or may replicate and successfully execute a business plan similar to Betfair s. If regulation is liberalised or clarified in some jurisdictions, in particular the United States, then Betfair may face increased competition 16

19 PART 1 RISK FACTORS from other providers, and competition from those providers may have a material adverse effect on the overall competitiveness of the online betting and gaming industry. Betfair may face difficulty in competing with providers who take a more aggressive approach to regulation, for example, the regulation of advertising, than Betfair and who are consequently able to capture market share in markets from which Betfair does not accept bets or in which it will not advertise. Any of these factors may materially adversely affect Betfair s operations, financial performance and prospects. Betfair s competitors may address or implement new technologies before Betfair is able to do so. Betfair s competitors may address or implement new technologies before Betfair is able to do so. There can be no certainty that existing, proposed or as yet undeveloped technologies will not become dominant in the future or otherwise displace Betfair s services or render them obsolete. If Betfair is not able to compete effectively with current or future competitors with superior technology, this could have a material adverse effect on Betfair s operations, financial performance and prospects. Betfair may face difficulties in protecting its intellectual property. The Directors consider Betfair s know-how, copyright in software, copyright in data and other intellectual property to be a competitive advantage and key to its success to date and future prospects. Betfair takes prudent steps to protect its intellectual property and know-how. However, Betfair s failure or inability to protect its intellectual property rights, including its rights in know-how or trade secrets, and in particular intellectual property relating to its Betting Exchange technology and proprietary code, could have a material adverse effect on Betfair s operations, financial performance and prospects. Betfair may face claims alleging infringement of intellectual property rights held by others. Betfair s business activities, products and systems may infringe the proprietary rights of others, and other parties may assert infringement claims against it. Any such claim and any resulting litigation, should it occur, could subject Betfair to significant liability for damages (or an account of profits) and legal costs and could result in invalidation of its proprietary rights, loss of rights to use software or other intellectual property rights or technology that are material to its business, distract management, and/or require it to enter into costly and burdensome royalty and licensing agreements. Such royalty and licensing agreements, if required, may not be available on terms acceptable to Betfair, or may not be available at all. In the future, Betfair may also need to file legal proceedings to defend its trade secrets and the validity of its intellectual property rights, or to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources. The occurrence of any of these events could have a material adverse effect on Betfair s operations, financial performance and prospects. Funds held in accounts with third party banking institutions may be subject to superior competing claims. Betfair s funds, and its non-us customer funds which are held in trust, are spread across leading banking groups. As at 30 April 2010, Betfair held million of such customer funds in trust. However, the failure of any one or more of these banking groups may result in all or some of such funds being subject to superior competing claims by creditors of those banking groups and, ultimately, lost. This would have not only financial implications, but would also significantly impact the confidence that customers have in the security of their money held by Betfair, which could materially adversely affect the operations, financial performance and prospects of Betfair. In addition, Betfair also has certain of its own funds deposited with such third party banking groups and the failure of any one or more of those groups could have a material adverse effect on Betfair s operations, financial performance and prospects. Continued depressed prevailing global interest rates may have a material adverse effect on Betfair s financial condition. As Betfair generates income from the management of customer deposits, management fee income, which represented 0.8 per cent. of Betfair Group revenue in FY10 (FY09: 2.8 per cent.), may continue to be affected by any continuation in depressed prevailing global interest rates. Any such impact could have a material adverse effect on Betfair s operations, financial performance and prospects. 17

20 PART 1 RISK FACTORS Betfair may be subject to deposit taking and financial services regulation. In common with other online betting and gaming companies, payments from Betfair s customers are required in advance of Betfair permitting such customers to participate in betting and gaming activities. The receipt of funds from customers may be subject to regulation in various countries. Accepting deposits in the United Kingdom is a regulated activity, generally requiring those that accept deposits in the United Kingdom to be authorised as banks. The Directors have previously received confirmation from the FSA that Betfair s acceptance of such payments does not constitute deposit taking and that therefore Betfair does not require authorisation in the United Kingdom by the FSA. If this position were to change, Betfair would have to either reorganise the way in which it receives payments from its customers or seek to obtain authorisation. Such a reorganisation of payment systems could disrupt the business and, as a result, may have a material adverse effect on Betfair s operations, financial performance and prospects. In addition, any failure to obtain a necessary authorisation may have a material adverse effect on Betfair s operations, financial performance and prospects. Betfair is reliant on Senior Management and key individuals. Betfair s success is in part dependent on the continued services and performance of certain Directors and members of Senior Management, details of whom are set out in Part 3 Directors, Secretary, Registered and Head Office and Advisers. While the Executive Directors and Senior Managers have employment contracts that are generally subject to notice periods of up to 12 months before termination, some have shorter notice periods. The loss of the services of certain executive officers or other key employees, particularly to competitors, could have a material adverse effect on Betfair s operations, financial performance and prospects. Betfair may not be able to attract, retain or motivate highly skilled employees. Betfair s success and its anticipated future growth depends in part on its ability to continue to attract, retain and motivate highly skilled employees. Although there are highly skilled and qualified workforces in the regions where Betfair currently locates its operating activities, competition for software professionals, engineers, sales and marketing and other personnel critical to the business of Betfair is intense. In some jurisdictions, (for example, in Malta), there may only be a limited number of persons with the requisite skills and it may become increasingly difficult to hire these persons. If Betfair is unable to attract and retain sufficiently qualified staff, Betfair may be unable to achieve or sustain its anticipated growth or to execute its strategic objectives, which could have a material adverse effect on Betfair s operations, financial performance and prospects. Risks relating to the Offer and the Shares Shareholders may be subject to voting or distribution restrictions on, or be required to dispose of, their interests in Shares as a result of the regulatory requirements to which Betfair is subject. The licensing or regulatory authorities in the principal jurisdictions in which Betfair has a betting and/or gaming licence or in which it may seek a licence in the future have broad powers to request or require reporting of various detailed information from and/or approve the qualification or suitability for licensing of, online betting and gaming operators, including their directors, management and the holders (legal and beneficial) of interests in shares. In some jurisdictions, such authorities may impose such information sharing and filing requirements on a continuous and ongoing basis, including in relation to Betfair, its Directors, management and the holders (legal and beneficial) of interests in Shares. These powers may be exercised by regulators as against the holders, whether legal or beneficial, of interests in shares or other securities in betting and gaming operators, as well as against the betting and gaming operators themselves, their directors and management. In some circumstances, the purpose of the exercise of powers by licensing or regulatory authorities may be to identify shareholders and directors whose involvement with the licensed entity the licensing or regulatory authority considers unacceptable because such persons are not suitable directors, managers or shareholders to have a direct or indirect financial interest in, or influence over, a betting and gaming operator in such jurisdiction. The information required, qualification or suitability requirements to be satisfied and ongoing regulatory filings to be submitted, may be very detailed, onerous and/or intrusive and may include, for example, 18