Eric Pecci is a J.D. Candidate, 2021 at NYU School of Law.
Spencer Dinwiddie is a point guard for the Brooklyn Nets in the National Basketball Association. On December 13, 2018, the up-and-coming star signed a three-year, $34 million contract extension that locks his salary at $22 million over the first two years and provides a third-year player option for the 2021-’22 season for $12 million.  A player option gives the player a unilateral option to either receive the agreed upon salary for the season or become a free agent and search for a more lucrative deal. Traditionally, NBA contracts are paid bi-weekly, although NBA rules allow for players to receive up to eighty percent of their yearly salary in a “balloon payment.” However, Spencer devised a plan to get paid a larger amount of his contract in advance. He plans to offer a securitized digital token to investors on October 21, 2019, using his contract as collateral. Spencer is permitted to raise up to $13.5 million with the securitization.
A “security” is a type of investment by which investors purchase interest in either equity or debt. A common type of security is a mortgage. An investor can purchase shares of a mortgage from the bank in exchange for its agreement to repay the investor with the homeowner’s monthly payments. In this case, Spencer’s Nets contract serves as the secured asset. Investor purchase shares of the contract by purchasing a digital token, called $SD8. Each $SD8 token costs $150,000, and the paperwork filed by Spencer to the SEC allows him to sell up to ninety tokens.  A securitized digital token is a type of security in which investors purchase a digital token and the accompanying smart contracts.
Securitizations and cryptocurrency offerings are subject to strict scrutiny by the SEC. Spencer Dinwiddie filed the appropriate paperwork and worked closely with SEC officials to ensure that his securitization met their standards. Spencer opted to use a digital token for safety and efficiency purposes. Traditionally, securities have to be serviced. Servicing requires an institution to continually monitor the viability of the underlying asset and transfer payments to the investors.  $SD8 uses the Ethereum platform, a platform based on smart contracts. Smart contracts are computer programs designed to execute automatically. Spencer’s contractual payments will be deposited to his account and the $SD8 smart contract will transfer the appropriate payout to investors immediately. Tokens that use Ethereum also use a digital ledger, also known as a blockchain. Digital ledgers provide security for investors because each transaction involving the token is automatically tracked and recorded in the digital ledger. Therefore, any investor can easily follow the transactions and duplicate transactions are impossible. By using a digital token to limit investor risks and getting permission from the SEC for a securitization, Spencer appeared ready to go forward with the securitization of his contract.
Investors who purchase $SD8 tokens will receive an interest rate comparable to government bonds (two to three percent) over the first two years of Spencer’s contract. If he opts into the third year of his original contract, investors will receive that same interest rate in the third year as well. However, if Spencer opts out of the third year of his current Nets contract to sign a larger contract, investors will receive a share of Spencer’s increased 2021-‘22 salary. Investors could see as much as a fifteen percent return on their original investment if Spencer signs a maximum contract in 2021.
Spencer benefits from securitization in a couple ways. First, the arrangement in consideration is essentially tantamount to a $13.5 million loan, except provided at bond-market interest rates, which are substantially lower than the interest rates attached to retail loans and other non-securitized financial agreements. Spencer can then use that $13.5 million as capital to invest in other areas. Celebrities and high net-worth individuals often have exclusive investment opportunities, and Spencer will be well positioned to take advantage of any opportunities that develop.
Second, the financial downside appears to be limited, only applicable if Spencer opts out of the third year of his contract. A player in Spencer’s situation in 2019 was eligible for a five-year maximum contract worth $190 million.  Only the first-year salary, or $32 million, would be shared with investors, leaving Spencer with an impressive $158 million. Were Spencer to earn that maximum contract, he is unlikely to regret sharing a few million with investors.
The terms also seem to present a good deal for investors. The investors essentially receive a government bond for the first two years, with the potential for fifteen percent return in year three. As with any equity, however investors run the risk the asset fails. It seems unlikely that the NBA or the Brooklyn Nets will go bankrupt within the next three years. A second failure scenario is that Spencer may opt out of his guaranteed $12 million in year three of his contract and find a cooler-than-expected market for his services. Spencer has taken out insurance in the event that he must accept a contract that pays less than $12 million in the 2021-’22 season, but the insurance premiums may not cover the whole gap. Additionally, NBA players generally do not opt out of player options unless they are quite sure they will find a larger deal. NBA contracts are fully guaranteed in case of injury or performance, so Spencer’s health will not affect investor returns. The only way that Spencer’s contract will be void is if he violates NBA’s collective bargaining agreement (CBA) and gets suspended without pay. Spencer plans to have $3 million total set aside in cash, Bitcoin and gold to protect investors from that situation.
On September 27, the NBA announced Spencer’s proposed tokenized security violated the NBA’s CBA. The NBA cited a clause in the CBA that bans players from using their contracts as an assignment.An assignment is when a party to a contract gives the responsibilities and benefits of the contract to an unrelated third party. Spencer has disputed the NBA’s characterization of $SD8 as an assignment and announced that he plans to move forward with the offering on October 21, 2019, in defiance of the NBA’s ruling. Spencer’s position is that the security offering is between the investors and himself, and the NBA has no authority to interfere. In other words, Spencer will still get paid by the Nets, and then he will move that money into the digital currency. Investors will have no rights or interest vis-à-vis the Nets. The NBA could potentially void Spencer’s contract if he goes through with the offering, which would invalidate the underlying asset of the security.
Spencer Dinwiddie has created a new way
for fans to invest in athletes with $SD8. If this works, future athletes will
follow in his footsteps to receive their paychecks early. Investors could purchase
the digital token and profit if their favorite athlete does well. However, two
questions remain. First, will the NBA allow Spencer and future athletes to
create this kind of financial instrument? And second, will any investor
actually purchase a token? Both questions will soon be answered.
 Shams Charania, Spencer Dinwiddie to Convert His NBA Contract, The Athletic (Sep. 12, 2019), https://theathletic.com/1199912/2019/09/12/sources-spencer-dinwiddie-to-convert-his-nba-contract-into-a-secured-digital-investment-heres-what-that-means/.
 Id. Ben Golliver, Kobe Bryant Receives $24 Million Lump-Sum Payment from Lakers, SI: Point Forward (Nov. 02, 2013), https://www.si.com/nba/point-forward/2013/11/02/kobe-bryant-lakers-contract-pay-day-24-million.  Spencer Dinwiddie, Fan Shares, https://dreamfanshares.com/sd8/.  Id.  Id.  Id. Shams Charania, Still Confused About Spencer Dinwiddie, The Athletic (Sep. 26, 2019), https://theathletic.com/1231225/2019/09/26/still-confused-about-spencer-dinwiddies-plan-to-turn-his-contract-into-an-investment-platform-we-talked-to-him-and-got-him-to-explain/.  Id.  Id.  Ameer Rosic, What is Ethereum?, Blockgeeks (May 2019), https://blockgeeks.com/guides/ethereum/.  Id.  Charania, supra note 8.  Ameer Rosic, What is Blockchain Technology?, Blockgeeks (Mar. 1, 2019), https://blockgeeks.com/guides/what-is-blockchain-technology/.  Id.  Charania, supra note 8.  Id.  Id.  Id.
 Luke Adams, NBA Maximum Salary Projections for 2019/20, Hoops Rumors (July 17, 2018), https://www.hoopsrumors.com/2018/07/early-maximum-salary-projections-for-201920.html. Charania, supra note 8.  Id.
 National Basketball Association, Collective Bargaining Agreement 62 (Jan. 19, 2017), https://cosmic-s3.imgix.net/3c7a0a50-8e11-11e9-875d-3d44e94ae33f-2017-NBA-NBPA-Collective-Bargaining-Agreement.pdf (hereinafter NBA). Id.  Charania, supra note 8.  Marc Stein, Nets Spencer Dinwiddie Can’t Sell Shares in His Contract, N.B.A. Says, N.Y. Times, Sep. 28, 2019, at B8.  NBA, supra note 23, at 60.  Richard Stim, What Is an Assignment of Contract?, Nolo, https://www.nolo.com/legal-encyclopedia/assignment-of-contract-basics-32643.html (last visited Oct. 31, 2019).  Spencer Dinwiddie (@SDinwiddie_25), Twitter (Oct. 13, 2019, 11:54 AM), https://twitter.com/SDinwiddie_25/status/1183455943205490688.  Id.