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Spencer Dinwiddie And Reimagining the NBA With Tokenized Contracts

It's an innovative concept with complex implications for NBA players and the league. Inside Spencer Dinwiddie’s plan to convert his contract into a tradable financial asset.
Jerome Miron-USA TODAY Sports

Jerome Miron-USA TODAY Sports

Want to invest in an NBA player’s contract?

This unusual question is the basic premise of Brooklyn Nets guard Spencer Dinwiddie’s plan to convert his employment contract into a tradable financial asset.

As envisioned by Dinwiddie, people could invest in his three-year, $34 million contract, just like they can invest in treasury bonds or corporate bonds. In monthly installments, investors would be paid back their principal, plus interest. Meanwhile, by receiving investors’ funds upfront, Dinwiddie would essentially be paid earlier than he’d be paid by the Nets. He could use those funds to invest in other ventures, ideally earning enough to payback investors and take home a healthy profit for himself.

Everyone wins, right?

Maybe. This is an innovative concept with complex implications for NBA players and the league.

Understanding how an NBA player’s contract could become an investment option

Dinwiddie, 26, details his plan on his DREAM Fan Shares (DFS) website. The plan is to offer “qualified investors”—more on that below—a chance to invest “in the first ever security represented by a Professional Athlete Investment Token (PAInT).” This security would be secured by Dinwiddie’s contract.

Under the current version of the plan, Dinwiddie would convert at least $4.95 million, and up to $13.5 million, of his contract into an investment vehicle. In other words, between 60% and 85% of Dinwiddie’s player contract would remain traditionally configured, with the Nets paying him over the next three years. Still, a sizable portion would become the basis of a security.

This arrangement calls for DFS to serve as a platform for the issuance of securities tied to Dinwiddie’s contract. DFS, to be clear, is neither serving as a broker nor issuing securities. A separate, Utah-based company called North Capital Private Securities is listed as the broker-dealer. Still another company, SD8 LLC, issues the actual securities; Dinwiddie formed SD8 for this very purpose. Meanwhile, Paxos Trust Company would take custody of the securities and manage disbursements of payments. Those payments would utilize Paxos’s system of stablecoin, a form of cryptocurrency pegged to an asset.

As you can tell, there are a lot of moving pieces.

Even if you are Dinwiddie’s number one fan, chances are you don’t have enough money to qualify as a potential investor. To that point, a minimum investment would be $150,000. Funds could be paid through U.S. dollars, BTH (Bitcoin Hot, a form of cryptocurrency) or ETH (Ethereum, a form of cryptocurrency). This arrangement therefore utilizes blockchain, a digital ledger used for financial transactions and other purposes.

A PAInT investment would be abbreviated as a “token” and would, as mentioned above, be backed by Dinwiddie’s contract with the Nets. This arrangement would reflect a debt instrument, meaning an asset that requires fixed and typically scheduled payments to investors. Payments reflect two forms of compensation: payback of the principal investment and interest on the principal.

The interest is crucial to the investor: it reflects the main upside to investing. The interest also represents a key factor in the investment option’s risk/reward profile. Savings and checking accounts, for instance, are extremely safe investments—banks are required to carry FDIC insurance for deposits up to $250,000—but they tend to offer only modest returns, with bank account interest rates generally in the ballpark of just 1% or 2%. Stocks, in contrast, are more volatile but have higher upside. Generally speaking, the safer the investment option, the less upside; the riskier the option, the greater upside. Buying a token in Dinwiddie’s contract, and earning interest on it, would represent another investment choice for qualified investors.

In addition to the prospect of interest payments, investors in Dinwiddie’s contract might also “be entitled to special premiums” based on whether Dinwiddie earns bonuses, negotiates a new contract and other factors. The exact terms of those premiums would be specified in the investor contract. In other words, even if the interest percentage for a token holder is not much higher than what can be found in a bank savings account, the prospect of additional benefits could make the overall investment more appealing.

Noah K. Murray-USA TODAY Sports

Noah K. Murray-USA TODAY Sports

Athlete empowerment

The details of Dinwiddie’s idea are intricate and rely on terminology unfamiliar to many. The larger picture centers on a much more relatable concept: athletes identifying new ways to maximize their earnings during relatively short and one-injury-away-from-abruptly-ending careers.

Tonya Evans, a former professional tennis player who directs the Blockchain, Cryptocurrency and Law certificate program at the University of New Hampshire Franklin Pierce School of Law, tells Sports Illustrated that Dinwiddie’s approach is innovative and sensibly draws on efforts by other players “to monetize the value of their professional careers by creating a holding company and selling its stock.” Evans highlights former Houston Texans running back Arian Foster, who played a pivotal role in the rollout of Fantax, a company that pays professional athletes money in exchange for a percentage on the player’s future earnings. By directly engaging with investors, Dinwiddie and his business partners would essentially take ownership over some of the functions that Fantax provides.

Evans, who is also an associate dean, professor of intellectual property law and attorney, sees the wisdom in Dinwiddie and other pro athletes “leveraging blockchain and cryptographically-secured tokens to ‘tokenizing’ their contracts or other revenue-generating assets related to their name, image, likeness and careers.” She stresses that individuals tokenizing their brands “is already occurring on the entertainment side of the equation.” Evans also highlights that “giving athletes direct to fan access” would “truly disrupt an industry laden with intermediaries standing between the athlete and the fan.”

Dinwiddie certainly appreciates the fleeting nature of an athlete’s career. In 2014, the Los Angeles native suffered a torn ACL in his left knee while playing for the University of Colorado Buffaloes. The injury contributed to Dinwiddie falling from a projected first round pick in the 2014 NBA Draft to a second rounder. With his plan to tokenize player contracts, Dinwiddie could play a transformative role in athlete empowerment.

Federal securities law governs Dinwiddie’s plan

In the wide scope of legal topics that apply to sports, securities law is seldom mentioned. Securities law consists of statutes, court decisions and regulations that oversee financial markets and investor relations in the United States. On a federal level, the U.S. Securities and Exchange Commission is charged with enforcing securities law. The SEC attempts to ensure that investors possess essential information concerning securities that are offered for public sale. The SEC also tries to prevent various kinds of fraud in the marketing and sale of securities.

Rule 506 of Regulation D of the Securities Act of 1933 would govern the selling of security interests tied to Dinwiddie’s contract. Among other things, Rule 506 would obligate Dinwiddie and his business partners undertake “reasonable steps” to verify that its investors are “accredited investors.”

Under SEC rules, an “accredited investor” is a person or a couple satisfying one of two tests: possess a net worth in excess of $1 million (excluding the investor’s primary residence) or have earned more than $200,000 in annual income ($300,000 for couples) over the last couple of years with a reasonable expectation of earning at least that amount going forward. Alternatively, an accredited investor can be a business with assets exceeding $5 million, among other required characteristics.

As to “reasonable steps” for verification, they often include review of financial statements, including tax returns, credit reports and W-2 wage forms. The legal onus would be on Dinwiddie and his partners to conduct the necessary due diligence.

If the initial offering is a success, Dinwiddie might later utilize offering methods that are not limited to accredited investors. Regulation A of the Securities Act of 1933, for example, permits a limited involvement of non-accredited investors.

Low risk—but not no risk—for prospective investors in Dinwiddie’s contract

No investment is “risk free” and that is true of buying a security interest in an NBA player’s contract. DFS openly acknowledges this point on its website. “Investments in the securities represented by Spencer’s PAInT,” the website cautions, “are illiquid and carry the risk of complete loss of capital . . . investors should review the risk factors within the offering documents before considering an investment.” A separate DFS page for “Private Placement Risks” stresses, in all caps, “INVESTMENTS IN PRIVATE PLACEMENTS ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. INTERESTS SHOULD NOT BE PURCHASED BY ANY PERSON WHO CANNOT AFFORD THE LOSS OF ITS ENTIRE INVESTMENT.”

With that in mind, when we say that an NBA player contract is “guaranteed”, we use that word loosely. Dinwiddie’s contract with the Nets is “guaranteed” in the sense that he will be owed $34 million regardless of how well he plays and regardless of whether he is traded to another NBA franchise. He’d also likely be owed that amount even if he is released or waived. The same would be true if he is seriously injured in the course of playing basketball.

However, circumstances can arise that convert an otherwise guaranteed NBA contract into one that doesn’t pay a player or is no longer guaranteed. None of those circumstances is likely to occur but each has a greater than 0% chance of occurring.

Risk that a labor dispute suspends player contracts

One investment risk is not about Dinwiddie but about the league in which plays. It’s not inconceivable that the NBA and the National Basketball Players’ Association could become embroiled in labor dispute that triggers the cancellation of games—and the accompanying cessation of player pay. The NBA, for instance, could lock out players. NBA lockouts occurred in 2011 and thrice during the 1990s. Alternatively, NBA players could go on strike or boycott games.

A work stoppage would follow failed negotiations between owners and the union on a new collective bargaining agreement. During a lockout or strike, players would not be paid or receive other employment benefits. They might have access to reserve funds set aside by the NBPA. Those funds, however, would likely reflect only a fraction of players’ salaries and only last for a limited duration.

It’s extremely unlikely that an NBA labor dispute will take place during the course of Dinwiddie’s three-year contract. His contract is structured as a two-year deal for ’19-’20 and ’20-’21, and a player option for ’21-’22. The deal will thus expire in June 2021 or June 2022. The current CBA is set to expire in June 2024. That expiration date fast forwards to June 2023 if either the league or players’ association opts out of the CBA following the ’22-’23 season. Therefore, if an NBA labor dispute is on the horizon, the earliest it would occur would be after Dinwiddie’s contract expires.

Still, the situation becomes more fluid when different possibilities are considered. Imagine that at some point over the next couple of years, Dinwiddie negotiates a new contract with the Nets. If investors to his current contract gain a preferred right to buy into a new contract, there’s at least a theoretical risk of a labor dispute impacting investors’ returns.