- September 16, 2019
- Posted by: STO Search & Filter
- Category: Sports Tokenization, Tokenization
We’ve got an article explaining the process, benefits and risks associated with tokenization of athlete contracts, sports teams, and sporting arenas.
Let’s get started.
What is Tokenization?
The act of tokenizing is to break down the ownership of something into multiple pieces.
Instead of one person or one company owning a team, the team may tokenize their ownership thus breaking this ownership into multiple “pieces”. This is defined as fractional ownership. Fractional ownership allows for multiple people, a.k.a investors, to participate in ownership and reap the benefits of the team’s profits.
How does Tokenization Work?
While tokenization is a fairly new concept, it is starting to be regulated by governments around the world. Investments into player contracts, teams, and arenas most commonly will fall under the category of a securities investments. Securities laws are quite strict in most parts of the world so teams and players may require clearance from financial government entities to perform acts of tokenized crowdfunding.
While we may still some years away from the vision of investing into your favorite sports teams, it’s best to learn how it can work.
Tokenization occurs on a layer of the internet called the blockchain. Companies such as Securitize, SWARM, Tokeny and STACKS among others, can leveraged blockchain technology to collect funds from numerous investors and assign ownership data in the form of digital tokens. These tokens are intangible, tied to the investor and prove ownership of assets and securities. Investors may later trade their token to others on secondary market exchanges.
Imagine sports trading cards, but each card is a token and each token pays you a return on your investment.
Why Would Athletes, Teams, and Arenas Tokenize?
Most recently we have seen Brooklyn Nets guard Spencer Dinwiddie express interest in tokenizing his annual contract salary.
This means instead of a monthly salary payment he would receive a majority of his salary as a lump sum figure upfront. He is willing to part with a small portion of his salary upfront to get the funds immediately instead of over a 12 month period.
If Spencer can find another place to invest his salary for a return greater than the discounted amount, he has now increased his total earnings to over 100% of his salary contract within the same 12 month period.
Who Would Invest in a Tokenized Athlete Contract?
What about that salary haircut Spencer took? If by example Spencer’s salary is $10,000,000 per year and he cashes out immediately for 9,000,000 from a pool of outside investors; the NBA still will pay a total of $10,000,000 throughout the year. Investors would receive their capital back of $9,000,000 and the balance 1,000,000 would be distributed as profits accordingly to how much ownership you had initially purchased.
Who can Invest into Tokenized Sports Teams & Arenas?
Investment regulations are a little tricky in the United States. There are several “types” of investors and depending on how Spencer tokenizes his contract, investing may be limited to certain people or companies only.
To learn more about U.S. securities offering types & investor qualifications check out this article from our friends at Hackernoon: Security tokens in the US: regulations and exemptions under the SEC laws
Why does Sports Tokenization Matter?
If we look at the data presented by https://www.basketball-reference.com/contracts/players.html the total of 466 basket ball players in the 2019 – 2020 NBA player salary contracts list add up to $3,721,163,740 (that’s billions with a B!). If each NBA player were to discard just 5% of their salary to receive an upfront payment this would create a potential of just over $185,000,000 in potential revenue for investors.
The players would receive their yearly salary upfront and as long as they make another investment which yields over 5% for the year they would net a greater return than waiting 12 months to receive their salary. The act of tokenization creates opportunities for increased wealth and returns to investors and players alike.
In the most used circumstances of tokenization we have seen investor’s benefit from: dividend returns, profit sharing, and voting rights. If sports teams issue a token that includes voting rights, token holders may have a say in team decisions such as draft picks and other important decisions.
What are the Risks Associated with Tokenization of Athlete Contracts?
In theory tokenization is a win win for everyone. However, there are some risks associated with tokenization as it is still new and has utilized on a limited basis. While there have been successful security token raises, the long-term proven results of successfully issued dividends are limited.
Athlete yearly salaried contracts are usually secured regardless of injury and play time. However, there could be some infractions and penalties assigned during the season which may reduce the total payable salary.
There also may be performance repercussions if an athlete feels his yearly salary has already been paid. This may lead to lack of practice discipline and motivation to compete.
What are the Benefits of Tokenizing Sports Teams & Arenas
Just as the ownership of Spencer’s contract can be distributed to a pool of investors, sports teams and arenas may follow a similar structure. When it comes to tokenization of large projects there isn’t a set standard of how many investors can contribute. Larger crowdfunding sums (teams or arenas) may include over 10,000 investors or more.
Investors can receive returns on ticket sales, merchandise, concessions and other costs attendees incur when transacting with teams and arenas. Standards are still being developed as tokenization instruments and the industry develops.
How Legal is Tokenization Today & Will Leagues Support Fractional Ownership?
The legality of tokenization exists in multiple jurisdictions today. In regards to permission from leagues, it is up to each league’s discretion if they have the right to interfere or if they choose to allow teams & players to move forward with ownership tokenization.
This article is sponsored by STACKS, an up and coming investment marketplace bridging individuals, venture capital firms, and institutions with compliant tokenized investment opportunities on an easy to use, safe and regulated portal for tokenised fundraising activities.