I read this update completely different, they are not being told...

I read this update completely different, they are not being told no, they are being told to correct something with their submission before they are formally ruled out. Which i suggest might be harder to come back from. Outside of a formal approval, I think this is better news than it is bad.
"advice from the regulator, Virginia Lottery, it has withdrawn its application" and "BlueBet was not deemed ineligible for a permit and
the withdrawal of our application at this stage will not prevent BlueBet from applying again"

The courtesy extended from the regulator and advance warning is what supports my view on this.

In my view the meat and potato of the correction needed lies here.
" licenses would, at this stage, be granted to operators which had experience in other states and have equity interest".

So my take away is you've ticket the boxes but we need to see you prove yourself in a number of other states before we wish to grant your license.

I think the point about "equity interest owned by Minority individuals or Minority-owned businesses" is superfluous to the announcement as BlueBet have a partnering strategy in place such as the Blue Water Resort arrangement. (I am aware this submission was unsuccessful but it is irrelevant to my point)

As IPO states, by the end of next year there is potentially a market of 40 states up for grabs I would see it unlikely any one company will win a spot at the table at all of them.