Ever wanted to have an “ownership stake” in a professional sports team but don’t have “big 4 league” money (or just don’t want to spend that much)? The perfect opportunity may be on the horizon. The BIG3 is selling 1000 “ownership” tokens broken into the following: 25 “Fire” tokens, which cost $25,000 each at market, and 975 “Gold” tokens, which cost $5,000 each at market per team. Prices will likely vary on the aftermarket. As BIG3 co-founder Jeff Kwatinetz stated, Fire token holders will have “more of a feeling of being an owner than a limited partner.” While this isn’t for the MLB, NBA, NFL, or NHL, still the opportunity to meet incredible players, watch this revolutionary league up close and personally, and again, you can say you “own” a team and have had their voices heard on matters relating to the management of the team!
On April 26th, SPORTICO provided more clarity on the plan. The well-known sports content platform reported that the tokens from the May sale are not in fact representative of an ownership stake in the BIG3 as the league, and more specifically, its investors own the teams within the league. However, specifically, the Fire token holders can see profits if the team that the stakeholder has a token for is sold. These teams would not be able to be sold without a majority of the relevant stakeholders approving the transaction. Upon approval and the ultimate execution of the “divesture,” 60% of the proceeds go to the league, with the remaining 40% being split amongst the Fire token holders.
The BIG3, founded in 2017, is a 3-on-3 basketball league founded by actor and NWA rapper Ice Cube and media executive Jeff Kwatinetz. As of right now, the league consists of 12 teams comprised of former NBA players and players from abroad. This league differs from the International Basketball Federation (FIBA) in that the rules are different. While there are too many differences to list, in the BIG3, instead of 2 and 3-pointers, there are 1 and 2-pointers. There are also specific spots on the court that if the player’s foot is touching during the shot process and they make it, will count for 4 points. The last big difference is that there is no jump ball, instead opting for a coin-toss. Some well known players include Allen Iverson, Chauncey Billups, Nick Young, Mario Chalmers, and Stephen Jackson.
On April 4th, the BIG3 announced that it was looking to revolutionize basketball, and team ownership in professional sports as a whole. The league plans to implement “decentralized team ownership.” For those unfamiliar with cryptocurrency, this will operate using blockchain much like other NFTs and cryptocurrencies like Bitcoin, Ethereum, Solara, and Dogecoin. This move is keeping in line with Ice Cube and Kwatinetz’s goal of “building a league that was innovative and created opportunities for players and fans alike that other leagues lack.” As of 4am on May 5th, these tokens are being minted and available for purchase.
It’s interesting to see a sports league, not just an individual team, work cryptocurrency and/or blockchain technology into even at least “quasi” team ownership-making it perhaps the first “crowd-funded” league of its kind.
This of course, raises legal questions-whether the Securities Exchange Commission (SEC) will consider the ownership “share” to be an asset or service remains to be seen. Kwatinetz told Forbes Magazine that “there’s a fine line that the SEC has yet to delineate between it being a security as opposed to being a utility [token].” The article, however, notes that ownership stakes in the BIG3 teams are different than the typical NFT, which acts as more of a collectible.
Perks associated with ownership include but are not limited to: eligibility to be team CEO, President, or Vice President, access to exclusive merchandise, tickets to games, proceeds from “future team sales,” and meet-and-greets with the players. Worth noting, aside from proceeds from “future team sales” it does not appear as though there is any sort of direct compensation associated with ownership.
The BIG3’s “ownership model” is similar to many NFTs, but there is a difference. In terms of similarities, the perks associated with being a stakeholder in a team resembles many other NFTs, though in particular, a fairly young but known sports NFT, Metafans, comes to mind. Metafans offers special perks for owners, including but not limited to access to tickets for major sporting events (often times at a discount, though there may be some free tickets available from time to time), “meet up” parties and receptions at well known sporting venues, as well as meet-and-greets with athletes and access to rare and otherwise exclusive merchandise.
The Motley Fool, an Alexandria, Virginia based investment advising and private financial company, defines a security token as something that represents ownership shares in a company that does business using blockchain technology. The Motley Fool also notes that an integral feature of many security tokens is the ability to exercise control within the issuing company-basically making the token holder a shareholder within the company.
A utility token, on the other hand, is something that equates to a promotional tool that grants holders special access or promotion for future product or service launches.
Further complicating the issue, the regulatory landscape surrounding tokens are incredibly unclear, but that is mainly because it seems as though relevant legislation focuses on “securities” specifically. In order to determine whether a digital asset is a security, courts often turn to what is referred to as the “Howey test,” which comes from SEC v. W.J. Howey Co.[1]The Howey test determines if a transaction has an investment contract, in which case the asset could be considered a security. As a point of clarification, again, the bulk of the scholarship in this space has focused on NFTs, and tokens and other situations like what the BIG3 will have to face soon, have received very little attention, if any. Per the test, an investment contract has 4 elements that must be met. 1) there must be an investment of money; 2) there must be an expectation of profits from the investment; 3) the investment of money is in a common enterprise and; 4) any profit comes from the efforts of a promoter or third party. While “common enterprise” has not been directly defined, in federal court, it the term is generally understood to be a common place where investors pool their assets in order to invest in a particular project.
Personally, I could see both sides as to whether the Howey test is met in the BIG3’s case. In opposition of the test being met, one may be able to argue that the investment is not in a common enterprise, as the stakeholder is investing in different teams. Conversely, the teams are all owned by the league, so it seems logical that the money must flow through the league. The transaction structure at this point is unclear, and unless this ends up in court or the SEC takes action, I don’t expect any clarity anytime soon.
Personally, I don’t see myself making this plunge right this moment (read: anytime in the near future) but when the time is right, I will most definitely be interested! Either way, this is an incredible opportunity to integrate fans and the general public into team ownership and to a degree “league operations,” even if it’s just selecting weekly awards or all-star players.
As an aside, I also take particular interest because I believe it can serve as an example. I think plenty of sports and leagues without the resources the big 4 leagues generally can benefit greatly from this model. Immediately coming to mind, the WNBA could benefit from something like this on a project like a developmental league. In the last few days, there has been a lot of social media commotion about the number of cuts being made by the WNBA teams, and how many of the top draft picks are in fact not ending up on the final rosters. One twitter user “jokingly” asked if anyone would be willing to pitch in and start a G-league of sorts for the league and this model honestly could create an avenue for others leagues to implement, and the powers that be within the WNBA should consider looking into this to put an end to the nightmares experienced by so many WNBA draft hopefuls and picks.
As this is not legal advice, should you have any questions or concerns, I highly recommend contacting a securities lawyer.
As of May 15th, 2022, Stephon Burton will be a graduate from Duquesne University School of Law in Pittsburgh, PA. He obtained his undergraduate degree from Washington & Jefferson College in 2019. He can be contacted via email at [email protected], and on twitter @stephonburton3.
[1] SEC v. W.J. Howey Co.,328 U.S. 293 (1946)
