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17 December 2019

Dawn of the Baller Bond?

Spencer Dinwiddie has long seen himself as far more than a basketball player. Describing himself as ‘just a tech guy with a jumper,’ the Brooklyn Nets guard turned down the chance to attend Harvard and spends his spare time immersed in the world and potential of cryptocurrency. When not offered an endorsement deal by a major shoe company on reaching the NBA, Dinwiddie took matters into his own hands, joining with athletic footwear experts to design his own basketball shoe which he believes to be better performing than market-leading brands.

It is this mindset that has led Dinwiddie onto his latest – and most controversial - off-court venture. He proposes to securitise his playing contract with the Brooklyn Nets, providing him with a lump sum payment that he can then invest, with the hopes of providing both a larger and more sustainable income long-term. The idea is elegant in its simplicity – Dinwiddie intends to sell 90 $150,000 ‘digital investment tokens,’ which will initially be available only to accredited investors, raising a total of $13,500,000 – more than his salary for this season, which is $10.6 million. These will come with a guaranteed repayment of principal plus interest, expected to be at 2.5%. Investors can be confident of their return because Dinwiddie’s playing contract is guaranteed until 2022. To lose the it, and therefore the means to repay his investors, he would either need to be recklessly injured outside of basketball (say, by going mountain biking) or be expelled from the NBA for serious misconduct (more on this later). If he is injured playing, training or by freak accident, the worst that can happen is that he is subject to the ‘stretch provision’ – a rule which allows teams to release a player and pay out their contract over a longer period than originally agreed. Though it would undoubtedly complicate matters, it should be possible to legislate for this in the model, as the total amount due to the player does not change.

This is, however, no ordinary bond. Dinwiddie’s proposed investment would culminate in sharing his 2021/22 basketball-related income – the final, and highest paid, year of his current contract – with investors, in a 60/40 split (investors share the 40). The significance? Dinwiddie can unilaterally opt out of this final year to become an unrestricted free agent, signing a more lucrative contract with the Nets or any other team he so chooses. The Nets, on the other hand, have no such option; if he opts in, they have to pay up. This is where the investment becomes more speculative than a typical fixed-rate bond. Dinwiddie arrived in the NBA to no fanfare, falling into the bottom half of that year’s draft of college players. However, his constant improvement has seen his reputation soar, and he is now widely considered to be one of the NBA’s best ‘value’ contracts – a player whose on-court production is abnormally good for their salary. As the NBA’s collective bargaining agreement places strict restrictions on renegotiating contracts which haven’t expired, good value contracts are not short-lived, as is often the case in domestic European football, but generally run their full course.

The upshot of all this is that, barring injury, Dinwiddie is expected to opt out of his final year and sign a more lucrative deal. According to ESPN’s maths, if his new contract were worth $20 million in 2021/22 – not an unrealistic number – investor’s returns would leap up to 10.6% over the three years. Even if Dinwiddie keeps his current deal going, the return would still be 7.4% over the three years. The model is designed to allow investors the chance to achieve substantial returns by speculating on Dinwiddie’s free agency value, while “guaranteeing” good returns anyway if Dinwiddie, for whatever reason, does not fulfil his full promise.

With such encouraging numbers, you would be forgiven for asking where the controversy lies. The answer can be found in the NBA’s aforementioned collective bargaining agreement, which prohibits the assignment of a player’s right to remuneration under their playing contract. The league has also suggested that the possibility of Dinwiddie declining his final year option to sign a better deal constitutes gambling, and raises integrity questions around Dinwiddie’s performance incentives in that year. Dinwiddie has been willing to adjust the premiums so that they are not based directly on basketball-related income, but this has not satisfied the league office, who have suggested that going ahead with the scheme might see the point guard’s contract terminated. For his part, Dinwiddie considers both arguments unfounded. As far as he is concerned, as long as the Nets owe him, and nobody else, his salary under the playing contract, he has not assigned it, and both the team and the league’s jurisdiction ends there – once he has been paid, the money is his to do with as he pleases. As to the gambling aspect, Dinwiddie has dismissed the assertion as ludicrous, pointing to the fact that the very existence of player options on contracts, which are permitted and regularly used in the NBA, are by their nature a gamble. The team and player are both in position to win or lose.

Dinwiddie’s arguments have legs – his proposition does not necessarily involve a legal assignment of his right to compensation from the Nets. He would be able to run the scheme whilst maintaining the sole right to pecuniary award under his playing contract; investors would have rights to their returns against Dinwiddie, but not against the Nets directly. From an integrity standpoint, the issue is thorny, but Dinwiddie has two strong lines of argument: he will retain most of the earnings from his option year, and his future reputation will affect both the remainder of his playing days and his post-playing career opportunities. That being the case, Dinwiddie’s financial incentive to perform well should not be substantially diminished. He might well also argue that the NBA has recently seen players sacrifice vast sums of money to move to a more competitive team, exemplifying that financial incentives do not necessarily govern players’ decisions and performance.

This argument may even have some application closer to home. Professional footballers – Europe’s closest equivalent in terms of earning power under team contracts – would face the further obstacle of rules against third-party ownership of players, but they may be able to reiterate Dinwiddie’s reasoning in refuting this. Investors in such a bond run by, for example, a Premier League footballer, would not own or dictate the playing rights or obligations of the player; rather, they would receive their dividend from the player’s private wealth. That the player requires their team wages to meet these demands could be argued to be tangential, and outside the jurisdiction of the sport’s governing bodies. One might argue that the financial incentive to maintain or improve a player’s wage level is equally strong with other debts, such as mortgages. Athletes’ life and career decisions must surely be affected by financial obligations and expectations, as with any other working person. Sports governing bodies will be understandably uncomfortable with the scheme, but there is a real question as to whether, if properly arranged, they have a right to prevent it.

But what of sports where the top competitors have no employment contract? How might such a bond operate when tied to, for example, a pro golfer’s prize money earnings? Take, as contrasting examples, Rory McIlroy and Patrick Reed. After a (relatively) down year in 2018, McIlroy’s PGA tour earnings were under $5 million. In 2019, his tour championship win took his earnings to over $20 million. Reed, on the other hand, claimed his first major in 2018 with a win at the Masters. In 2019, he won only one tour event all season. Where might both players – and their investors – have stood had they taken upfront cash in exchange for a share of their winnings? Those who believed that McIlroy would rediscover his top form would have been handsomely rewarded, while Reed’s backers would potentially have lost money – possibly whilst he personally successfully hedged against his dip in form. The integrity issues here become even more perilous – what happens when a player skips an event due to a nagging injury, costing investors money? Or is pictured out for dinner the night before they are due to play? The lack of an employer policing the player’s conduct arguably brings into play far greater risk for the investor, and subsequently far greater risk to the sport, as players’ performances begin to have a direct impact on the finances of some followers of the game.

The questions by no means end there. Dinwiddie has talked about the way that this system could operate as a downside minimiser for players in leagues like the NFL, where the contracts are typically not guaranteed. Where that is the case, the investor takes on the risk of injury or release alongside the player. Governing bodies would be rightly concerned by this model. Given recent efforts to tackle concussions in sport, for example, the question might be asked: what happens if a player, especially of a contact sport, ought to retire due to head trauma, but plays on out of a need to recompense their investors? Where a player is without the comfort of a guaranteed salary in the event that they cannot play or their standard of performance drops, he or she may be incentivised to take greater risks. There is an unavoidable danger that the potential backlash from investors presents a more formidable barrier to walking away than the athlete in question’s personal finances.

Dinwiddie, though, makes a compelling argument for his model as a vehicle for athletes’ wellbeing. He points to the number of high earning athletes who go bankrupt after their playing days, unable to sustain the lifestyle they maintained at the peak of their earning capacity. The rationale is that if a highly paid player gets their money upfront, ties the bulk of it up in investments (such that it can’t be easily spent) and establishes a lifestyle on a $500,000 annual expenditure, they will be set for life. Their playing-days fortune will last because their investment portfolio, by the time they retire, will be of such a size as to be able to both sustain their lifestyle and act as a safety net. There is, of course, no absolute guarantee that players will invest wisely, but the effort and forethought required to set up the investment product will necessarily involve qualified advice and careful consideration of where to place the proceeds. This is likely to encourage cautious investment and budgeting more than a monthly influx of salary payments. The Nets’ guard contends that his model encourages prudent financial planning and allows athletes to maximise the benefit of their lucrative playing careers long-term.

Dinwiddie’s plan has taken previous attempts to make athlete contracts tradeable commodities a step further, cutting out the holding company and giving complete control to the athlete. The idea is radical and by no means without its opponents and drawbacks, but Dinwiddie’s vision of the secure, self-empowered investor-athlete is compelling, and his investment model has readily plausible upside for both himself and his prospective investors. If the NBA’s stance proves intractable, the concept might yet fade into distant memory. But if he can win this crucial battle and get his investment vehicle off the ground, Dinwiddie may have found the sports industry’s answer to the Bowie Bond.


For more information please contact Daniel McDonagh on +44 (0)20 7438 2168 or at daniel.mcdonagh@crsblaw.com.

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