On January 13th, 2020, Brooklyn Nets guard Spencer Dinwiddie gave fans an opportunity to become more invested with an NBA player than ever before. The launch of Dinwiddie’s DREAM Fan Shares allows accredited investors to use digital tokens to invest in Dinwiddie’s three-year, $34 million guaranteed contract. The Ethereum-based blockchain platform claims that it will “empower athletes, artists, and influencers to take control of their financial destiny” by allowing Dinwiddie and other athletes to collect the value of their contracts up front. This business loan style restructuring could give athletes the opportunity to reinvest their guaranteed earnings sooner, resulting in greater wealth in the long term. Dinwiddie, who wears number 8 with the Nets, is planning to sell ninety “SD8” tokens at $150,000 each, allowing him to raise $13.5 million. Each token is expected to pay investors a 4.95% base monthly interest over a three-year bond, with the full principal paid out at the end of the period. In addition, investors could earn special premiums if Dinwiddie achieves certain bonuses in his contract.
The investment period for SD8 tokens ran from January 13th to February 10th, but only investors accredited under Regulation D of the 1933 Securities Act could participate. Under SEC regulation §230.501(a), accredited investors must either have a net worth of over $1,000,000, have an income of at least $200,000, or be a business with assets worth over $5,000,000, among other requirements. By limiting the security to accredited investors, Dinwiddie was able to offer the tokens under SEC Rule 506(c) as long as Dinwiddie took “reasonable steps” to verify accreditation status.
Tokenizing this contract was not done without controversy, however, as the NBA strongly opposed Dinwiddie’s idea when he first announced it in September 2019. The NBA’s initial stance included a threat to ban Dinwiddie from the league, citing language in Collective Bargaining Agreement (CBA) Article 2.13(d) and which prohibits athletes from transferring their right to receive compensation under an employment contract to a third party. The NBA took the position that Dinwiddie’s legal obligation to his investors would be equivalent to such a transfer. Carlton Fields counsel Andrew Hinkes also notes that the league may have been concerned about taking on liability if the NBA or the Brooklyn Nets were named as deep pocket co-defendants if a dispute were to arise between Dinwiddie and his investors. After several months of negotiations, which included the NBA Player Association’s legal team representing Dinwiddie and law firm Debevoise & Plimpton representing the NBA, the two parties came to an agreement. Dinwiddie was allowed to move forward, provided he remove a provision that would allow him to opt out of the third year of his contract and reward investors if he was able to sign a more lucrative new deal. The NBA viewed this provision as too similar to gambling, so the tokenization in January proceeded without it.
Although Dinwiddie’s “guaranteed” contract cannot be waived for injury or poor performance, there are still risks in investing in the contract. An NBA labor dispute, which has occurred four times over the past thirty years, could prevent Dinwiddie from being paid. No labor dispute is expected during the Dinwiddie’s current contract due to the length of the current CBA, but if the 26-year old decides to tokenize his next contract, an NBA lockout or strike would be a more significant risk. Additionally, Dinwiddie could lose substantial earnings if he is suspended for steroid or recreational drug use, on-court conduct, off-court legal issues, or injuries sustained while doing a wide range of prohibited activities such as using fireworks or driving a motorcycle. While Dinwiddie’s past conduct gives no indication that such issues would be likely to arise, it is not impossible. Hogan Lovells partner Ted Mlynar notes that it is important that these possibilities of contract nullification be disclosed in the offering documents for the tokens.
Investing in athletes’ contracts is not an entirely novel idea: Fantax received limited success in setting up a stock market for sports from 2012–2017. But Dinwiddie, who has described himself as “a tech guy with a jumper” believes his DREAM Fan Shares could become the future of the league. As the investment period for “the athlete” Spencer Dinwiddie wraps up, the DREAM Fan Shares website is teasing investment opportunities in the “the artist” and “the influencer” coming soon.