Background

Spencer Dinwiddie wants to tokenize and sell the first year of his 3-year contract with the New Jersey Nets. In exchange for an up-front payment of up to $13.5 million, Dinwiddie would provide “DREAM” tokens, which entitles token holders to the full $16-million of the first year of his contract (which is guaranteed). Not a bad one-year return for an investor. The raise would be a private sale with a minimum investment of $150,000. Investors would also get first dibs on a similar token that Mr. Dinwiddie might offer for years two and/or three of his 3-year deal.

The income sharing concept that Mr. Dinwiddie proposes is not new,[1] but tokenized income sharing agreements (“TISA”) are, and they are exciting. Much like a cryptocurrency, a TISA is easily salable and tradeable, and can flourish in a liquid trading market. A TISA is a security and must be regulated accordingly, however, through the use of self-executing smart contracts, much of the regulatory and disclosure burden may be automated.

The NBA said NFW[2] to Mr. Dinwiddie’s proposal, but keep the faith, Mr. Dinwiddie, the NBA (and the rest of the world) will change its tune.

Mr. Dinwiddie can now get a pretty sweet AMEX, but he couldn’t when he was a Buffalo.[3]

The current system for personal credit is beyond broken. Don’t believe me? Take a look at your credit report. Here are some (sanitized) items on mine:

I have had a credit card for over 30 years;

My current car payment is $XXXX and is current except for a month 4 years ago when I was out of country and forgot to make an arrangement;

I recently purchased a refrigerator and opened a store credit card in doing so.

I have a parrot named “Elvis” (Okay, not on the report and not true, but it is about as relevant).

Here are some items that are not on my credit report:

I’ve been a lawyer for 25 years at notable firm;

I went to Top 10 undergrad and law schools;

I founded one of those firms 15 years ago;

I speak at conferences and usually have a pretty full room of people with excellent credit;

I’m a spectacular attorney but I’m not looking for clients (half-truth, but you get the idea).

What is the main difference between these two lists (excluding the last item in each case)? The top one is the list of stuff that the credit reporting agencies can get away without asking for. It has not changed in over 40 years. Yes, they have a bunch of quants drawing algorithms to ding me for that missed car payment, but the fact is that I have taken absolutely no action to provide my lender much more pertinent information and . . .for the most part, if I did, they would not take it.

As for the young Mr. Dinwiddie . . . “Huge skills, but can’t get credit to pay the bills.”[4]

The NBA slams Spencer Dinwiddie’s DREAM, but the djinn is out of the bottle for tokenized borrowing against future revenue.

Hello, my name is “Ninja;”

My name is “Tre Jones;”

My name is “Lil Poison”

My name is “Peter Alexis Shukoff”[5]

My name is “the kid next door”

Ask a teenager what they want to do when they grow up, the answer might be:

“I want to be a YouTube star, an Instagram influencer or a pro gamer… and I’m already doing it, pops.”[6]

The list above starts with a very well-known pro eSports players and goes to a potential future pro-basketball player (Duke University’s current point guard (Go Devils!!)); then to the youngest ever pro eSports player; and finally, to a successful YouTuber. At one point, they were all “the kid next door.”

Burgeoning talent is more often than not cash poor.

At some point, the talented attract attention from scouts, agents, managers, etc. Right then, you can take a really good crack at predicting future income generation. There will be a range of accuracy, but without question, on a large scale, with appropriate algorithms and discounted cash flow analysis. A risk/reward statistical model can convert these future revenue streams into properly priced financial instruments. There is actually nothing new about using more personal characteristics to demonstrate whether a person’s efforts would be a worthwhile investment.

Photo by Florian Olivo on Unsplash

The larger application is probably eSports[7]

The NBA and other pro sports provide a source of a comparatively small number of individuals who provide a more certain source of larger income streams. That said, as the eSports industry grows, the universe of potential eSports individual players and teams that could use the TISA model is much larger. They may not immediately warrant their own securitized contracts, but much like consumer debt obligations, they can be an attractive pooled asset.

Consider a 12-year-old named “Bam” who just so happens to light it up on Call of Duty:

1. Bam knows he’s good at Call of Duty so he sets up a Twitch[8] stream;

2. Bam does well at a few open tournaments and his Twitch stream gets a few views;

3. On top of having “game,” Bam is also quite engaging — — viewership grows;

4. Not long after that, Bam attracts the attention of scouts/managers/teams (“Industry”);

5. Industry offers to pay Bam $15,000 as a sponsorship advance and to set him up with sponsorships and a place on a pro team in exchange for the first $20,000 he makes. The industry also throws in a series of options to renew the deal at higher dollar figures if his eSports career warrants the increases.[9]

6. Bam buys some new gear and puts $12,000 into the college fund.

7. The next year, Bam is an icon and he receives a $750,000 advance against the first $1,000,000.

The first-year contract — 1,000 BAM (tokens) in a pool.

Bam’s $15,000 advance is not much in the grand scheme of things. 1,000 BAM equivalents, however, if pooled, would be a $15,000,000 raise for a projected $20,000,000 return.[10] We are now well within the world of privately funded transactions.[11] Although some creative branding might generate public interest for a pool of small TISAs (picture “Call of Duty” Amateur” tokens), a private investment company or fund is the likely purchaser of pooled products. As far as the “industry” players (and the public) go, contract two is where things start to get interesting.

That said, an eSports team might use the TISA model to finance player advances for a farm league. For that matter, the teams themselves might issue TISA backed by the team’s income streams as a finance tool to avoid issuing dilutive equity or restrictive debt.

Of course, the model is not limited to eSports; if the NCAA starts allowing athletes to be paid, the same model could be in play. Outside of the gaming/sports context, you could imagine each graduating class at Julliard banning together to create a pooled TISA in order to pay for seed funding on their respective music careers.

The second contract — Here comes the Bam . . . Token

Bam’s second contract, where he raises $750,000 in exchange for a $1,000,000 return, is much more likely to be saleable on its own as a “BAM Token.” This is where the TISA model starts to get really interesting. Bam’s revenue streams might include: (i) his player contract; (ii) a game controller endorsement; (iii) other personal merchandising; (iv) payments as a social media influencer; appearance fees, etc. Bam also wants to capitalize on his popularity by selling “equity in the Bam enterprise.” The BAM Token includes an opportunity to buy into Bam’s third-year contract. That option is worth something and might put an extra 10% on the value of a BAM Token. If BAM does well on the circuit, his Token holders will profit. Not a bad fan club.

The Bam Token issuer; smart contracts, income stream aggregation, securitization and tokenization.[12]

Bam may draw revenue into the tokens, but he does not power or administer it. Behind the scenes, sits a corporation responsible for making sure everything happens as it should. Here’s a bit of the inside machinery that the BAM token issuing company would perform:

1. Sign the agreement with Bam (which may or may not require immediate payment of the advance (payment might wait until after the BAM Tokens are sold to the ultimate purchasers);

2. Contact all BAM Token revenue sources to establish that all income streams run directly to an account set up to aggregate the income prior to distribution;

3. Establish an automated smart contract that verifies receipt of funds into the collection account and distributes income to Bam and the BAM Token holders in applicable proportion. The smart contract would also establish real time auditing as well as handle all required tax reporting;

4. Create applicable securities disclosure documents and facilitate the sale of a tracking stock[13]that would be branded as the BAM Tokens through appropriate channels;

5. Manage BAM Token investor relations and to the extent required for public trading of the BAM Tokens and publish required public disclosure (including Securities Exchange Act financial disclosures);

6. Administer compliance with all applicable contracts (take action in the event of any breach);

7. Manage redemption or cancellation of BAM Tokens at the end of the term (or earlier if required).

Can I get a BAM Token please — Endless possibilities for a liquid trading market

The BAM Token is an “investment contract.” In that sense, it is issued and treated exactly the same as any “Security Token” that might be traded on a cryptocurrency exchange. That said, as an equity security, it can also be traded on more main stream alternative trading systems.[14] For that matter, private parties can trade BAM Tokens privately as easily as they can trade any cryptocurrency.

As with any other securities, analysists would study Bam’s likely future income trajectory (playing style, popularity, etc.). The BAM Tokens would likely decrease in value as the term passes[15](much like bonds (or Mr. Dinwiddie’s DREAM), so funds and traders would likely treat them as variable rate bonds. Alternatively, a TISA without an end term might look more like a stock. There is no end to the number of products that might trade in this manner. Taken to its logical conclusion the TISA may be a bridge to more liquid, global and open securities than currently available.

It’s only a matter of time Mr. Dinwiddie; the NBA will come around (starting now).

The NBA may be the largest, single, non-publisher, investor in the eSports industry.[16] In fact, the NBA is running its own eSports leagues. The Sacramento Kings just became the first team to announce its intent to issue team tokens to its fans.[17] While neither of these activities rise to the level of issuing a TISA, they do inevitably lead to that conclusion. The NBA is not going to start at the top. There is too much brand risk.

They will start in eSports. Financing eSports through sale of interests in a pool of low-level player TISAs is the perfect entre. Not only is the investment risk diversified; so is the embarrassment risk. The NBA does not want to have to worry about NBA players giving their friends “inside information” that would allow illegal securities trading (for example the impending announcement of a shoe deal). That’s not an issue with a pool of TISAs. No particular player is material to the pool as a whole. It is a pilot program waiting to happen.

Conclusion

Mr. Dinwiddie may not be the near-term beneficiary, but the TISA framework could become very important in other places. The burgeoning eSports industry may thrive off of funding from outside sources investing in TISAs. A financial company willing to conduct price discovery based on relevant information from their borrowers could revolutionize consumer borrowing models. musicians, celebrities, actors and other individuals with strong future income trends may find an easier path to working capital.

Keep the faith (and the DREAM) Mr. Dinwiddie, it may take a few years before we work out enough of the kinks to make for a viable (and safe) pro athlete TISA; but it will happen.