Spencer Dinwiddie of the Brooklyn Nets (the Nets) is having a career year in the National Basketball Association (the NBA), both on and off the court.
On the court, prior to the season’s suspension, Dinwiddie was averaging a career-high 21 points per game, and propelled his team into a playoff position. Off the court, the 26 year-old is proposing to do something that no professional athlete has ever done before — tokenize his contract.
The self-proclaimed “tech guy with a jumper” is stated to make approximately $34 million over the next three years. He plans on turning $13.5 million of his contract into a debt issuance through an investment vehicle called Dream Fan Shares, where he will sell 90 SD26 Coins or Professional Athlete Investment Tokens (PAInTs) priced at $150,000 apiece. The coin will be a three-year bond expected to pay out 4.95% base interest on a monthly basis, with the full principal paid out at the end of the period upon maturity in a bullet payment.
Dinwiddie’s pioneering efforts haven’t come without their fair share of opposition from the NBA. He was initially told the tokenization would violate collectively bargained league rules, including the rule prohibiting gambling on NBA-related matters. After revising his proposal, the NBA is now in the process of reviewing whether Dinwiddie’s updated investment vehicle is permissible under the league’s collective bargaining agreement.
But assuming his proposal is approved, how would investing in Dinwiddie’s NBA contract actually work?
The digital tokens will allow Dinwiddie to take an upfront loan which he will be able to invest immediately. In return, investors would be paid their principal plus interest. The goal for Dinwiddie is simple: achieve a rate of return great enough to 1) make a profit personally, and 2) cover the debt obligations to his investors.
Investor and Regulator Concerns
However, it is not only the NBA that is likely to have reservations about Dinwiddie’s proposal. The uncertainty surrounding this investment vehicle raises some concerns for investors and regulators alike.
The tokens will be launched on the Ethereum blockchain, and can only be purchased by qualified accredited investors in accordance with SEC Regulation D, Rule 506 (c). It follows that Dinwiddie assumes his digital tokens will be classified as a “security” as defined under s. 2(1) of the Securities Act of 1933, and will therefore be subject to US securities regulation. In Canada, PAInTs may be classified as securities as well in accordance with the legal test for defining a security, and any potential investors would have to qualify as accredited investors in accordance with National Instrument 45-106 – Prospectus Exemptions.
Regulating coin/token offerings has been a persistent concern of Canadian securities regulators, as many businesses in Canada have taken the position that coins/tokens are not subject to securities laws. In response, authorities have issued further guidance on when an offering of tokens may constitute a securities offering. As such, in the Canadian context, Dinwiddie’s assumption that his token is a security might be an appropriate one. PAInTs (like many coin/token offerings) have no proven exchange platform or intermediary. In order to protect investors and promote transparency, Canadian regulators would be wise to ensure that PAInT-style tokens are regulated the same way as other securities, and be subject to the same registration, marketplace, and reporting regulations.
Dinwiddie’s platform also raises the prospect of potential conflicts of interest. Undoubtedly, an athlete owes a duty to the NBA per their collective agreement. At the same time, an athlete, like Dinwiddie, may owe a duty to his investors or other stakeholders if the structure takes the form of a corporation or other similar entity. In Canada, for instance, a director of a company owes a fiduciary duty to their corporation, and (if he structures his platform through a corporation) such a duty may run contrary to the duties owed to the NBA and the athlete’s team.
All things considered, Dinwiddie’s proposal is an ambitious and innovative investment vehicle that could revolutionize the way athletes monetize their professional careers. Assuming his platform is a success, it is not hard to imagine athletes from all over the world leveraging their contracts in a similar fashion.
The authors would like to thank Josh Hoffman, Articling Student, for his assistance in preparing this legal update.