How investing $150K in Spencer Dinwiddie would actually work

At the end of the 2018 NBA offseason, Brooklyn Nets guard Spencer Dinwiddie was hanging out in Los Angeles with Jeremy Adams, a close friend from their days at the University of Colorado. The two played basketball at Boulder, and they share an enthusiasm for the world of blockchain technology and entrepreneurial pursuits.

Dinwiddie had thoroughly enjoyed the process of developing his own shoe the previous year outside the sneaker industrial complex. He and Adams wondered: What other opportunities existed out there?

"With the shoe, we started exploring ways to try to take control of the brand," Dinwiddie said.

For years, Dinwiddie threw himself into the world of markets -- both traditional sectors like financial services and newfangled corners of the ecosystem like cryptocurrency. These days, it's normal to walk into an NBA practice facility and find a hard copy of a pitch deck lying around the locker room. But Dinwiddie isn't just into investing; he is a guy with a more holistic interest in how money works. How is value transferred in an economy? How do you make markets more inclusive? What's a cool way to bring liquidity to an illiquid, unrealized sector?

On that last question, Dinwiddie realized the next step in his entrepreneurial journey was to create a financial instrument that would allow him and other athletes to fully maximize their upside. Why not just be the investment vehicle, allowing people who believe in that athlete to cash in when he makes good on his potential?

With that, Dinwiddie decided that in addition to being an NBA combo guard, he also would fulfill a new dream of being a debt security.

The idea of athletes or celebrities securitizing their talents has precedent. In 1997, musician David Bowie worked with an investment bank to sell "Bowie Bonds." Investors were paid a fixed annual return of 7.9% over 10 years for bonds that were backed by Bowie's intellectual property -- in other words, his recordings and songs -- and his rights to royalties.Chicago White Soxslugger Frank Thomas took a long look at securitizing his contract in 1998, but the plan got hung up over skittishness about clauses in his deal that would nullify the contract for scenarios like a non-sports-related injury or player strike.

Dinwiddie plans to offer what he has named his Professional Athlete Investment Token (PAInT) as soon as this week. The offering has a minimum investment of $150,000, and it would be available only to accredited investors on a new platform that he hopes will eventually host dozens of athletes who follow his lead.

The NBA has taken issue with Dinwiddie's efforts, and the two sides have been debating whether issuing a PAInT would violate the league's collective bargaining agreement (CBA). Dinwiddie is hopeful that the measures he has taken over the past few weeks will persuade the league of its permissibility under the CBA.

So what exactly is Dinwiddie trying to do? We dig into the nuts and bolts of PAInT.

What is Spencer Dinwiddie's plan?

A few different things.

In the big picture, Dinwiddie's token would be a proof of concept for a larger objective: He wants to create a new asset class -- athletes -- that would allow fans and anyone else to invest in players the way you would the stock market, a treasury bond, a real estate fund or cryptocurrency. Those assets could then be traded on a platform that he is in the process of creating.

Most immediately, though, he wants to offer a debt issuance to accredited investors that would be backed by his earnings in the 2021-22 season. This product, which would be issued as a token (PAInT), would have many of the characteristics of a typical bond, but it's quite different.

Can anyone buy a Dinwiddie token?

No. You must be deemed an accredited investor under Regulation D of the Securities Act. Accredited investors must earn a hefty income and/or have a high net worth, plus the requisite experience dealing with sophisticated financial offerings.

The minimum investment in a Dinwiddie token is $150,000, and Dinwiddie is offering a maximum of 90 tokens for purchase. That would represent $13.5 million or around 40% of his three-year, $34 million contract with Brooklyn.

I'm accredited and just happen to have $150,000 to invest. So walk me through it.

Whereas most investors purchase a security through a broker, you will buy a digital token for $150,000 and it will live as a form of digital currency on a blockchain (more on that later). Another way to look at it: You're loaning Dinwiddie $150,000 that he will promise to pay back in two years.

Though the information isn't public, Dinwiddie says the token likely will pay an annual interest rate in the range of 2.5%. That would mean that on that initial $150,000 investment, you would earn $3,750 over the next year -- paid either quarterly or biannually -- and $3,750 in 2020-21.

Year 3 is when the token effectively matures and things get interesting for both Dinwiddie and you. Dinwiddie is performing his own personal "revenue sharing" of his individual post-tax 2021-22 basketball related income. Dinwiddie said this will be done at a 60-40 split and that 40% will be paid out to investors.

Because Dinwiddie owns a player option for the 2021-22 season, there's a great deal of elasticity here. Let's say the 26-year-old guard continues his upward trajectory over the next two seasons and opts out of his current deal with the Nets. If his new contract plus additional income pays him a total of $20 million in 2021-22 and his taxes and related expenses run 50% of his income, then you would receive your original principal of $150,000 back, plus an additional $52,934. In the end, you would've earned 10.6% annually over the term of the investment.

What if Dinwiddie decides to opt into the final year of his deal?

Dinwiddie is scheduled to earn $12.3 million in 2021-22 if he opts in -- much less than the $20 million in the above scenario -- so the rate of return would be considerably lower, approximately 7.4% annually, or $150,000 plus an additional $35,825.

What's in it for Dinwiddie?

Dinwiddie raises millions in cash at the front end of his contract that he can now put to work in various investments.

"The $13.5 million would be in relatively traditional vehicles," Dinwiddie said. "You want to be strong with your money -- we've all heard the horror stories. These investments are designed to be something that athletes can benefit from. We're going to set aside [an amount] for venture capital, but it's not like I've found a new element or anything like that."

If he can achieve a decent rate of return on those investments, he can recoup his debt obligation. More broadly, Dinwiddie would establish himself as an innovator who blended traditional and more cutting-edge market tools to create a new financial product that could become fantasy sports on steroids. If that platform became successful, Dinwiddie's 2019 offering could go down as an historic prototype, and he would have ownership of what could potentially be a profitable venture.

Will there be a secondary market for the token?

Not initially, and Dinwiddie's offering can't be traded for one year. But Dinwiddie sees a future where, once there's a critical mass of athletes who have their own tokens, you could log onto the platform and trade NBA players the way you would trade other securities.

"We envision a world where you're gonna be able to trade a Spencer for aKyrie [Irving] for a [Kevin Durant]," Dinwiddie said. "In a lot of ways, it kind of does represent this paradigm of real fantasy sports. It's an extremely interesting model. It's a non-correlated asset in relation to the legacy market, and we're gonna have a lot of fun with it."

Is there a cryptocurrency and blockchain component to what Dinwiddie's doing?

Though Dinwiddie is a cryptocurrency enthusiast and payment for a token can be made in cryptocurrency, he is issuing this offering in a more traditional construct. The token will exist on Ethereum, a blockchain-based platform that functions like a ledger, but it is functionally a debt security.

Is this a risky investment?

The 10-year U.S. Treasury Note, arguably the most reliable debt instrument in the world, currently offers a yield of 1.753%. Dinwiddie's offering would pay around 2.5%, marginally more, but it comes with more credit risk. After all, PAInT is an unproven asset class with an unproven payment mechanism -- and novelty, by its very nature, is uncertain.

Yet an investment's risk is measured in downside, and it's difficult to imagine scenarios in which a token holder's principal disappeared. Even if Dinwiddie suffers a career-ending injury or underperforms to the point where he falls out of the Nets' rotation, he is guaranteed a salary of $12.3 million in 2021-22, when the token comes due. The circumstances in which he doesn't receive that money are catastrophic -- the NBA going bankrupt, Dinwiddie violating the league's drug program or Paragraph 16 (effectively the CBA's morality clause).If Dinwiddie were to be waived and stretched prior to his option, he'd earn only a fraction of that $12.3 million, which would greatly reduce the payout to investors and drop the annual rate of return below 4 percent.

So he's using his contract as collateral?

No, and for Dinwiddie, that's a very important point.

Dinwiddie says he will lock up $1 million in cash, $1 million in gold and $1 million in Bitcoin, with the larger goal of setting aside as much as $9 million in reserves. These holdings aren't exactly risk-free -- Bitcoin in particularly is volatile -- and he's in conversation with his financial advisors about where they'd place the additional millions.

But if Dinwiddie can get to $9 million in escrow and/or reserves, there would be moderate loan coverage, in addition to the $12.3 million he's due before taxes in 2021-22 (which could be considerably greater if he opts out and signs a more lucrative deal in free agency).

One could argue that the token is implicitly backed by the contract, but not explicitly.

I read a statement issued by the NBA to the New York Times that the league regards Dinwiddie's plan as a violation of the league's collective bargaining agreement. What's the nature of their objection?

The NBA believes Dinwiddie's plan violates CBA rules prohibiting players from entering into a legal arrangement that transfers the right to their NBA pay to third parties. The league says the rule exists to protect players' long-term financial health and avoid potential third-party interference with relations between teams and players (for example, an unhappy investor suing the Nets).

If Dinwiddie moves ahead with the opening of his investment vehicle, what recourse does the NBA and/or the Nets have? Could they suspend him? Could the Nets nullify his contract?

Sources say the NBA hasn't reached the point where they're contemplating disciplinary actions against Dinwiddie, and the two sides are continuing to discuss the matter. But if the league felt like Dinwiddie was truly in violation of the CBA, disciplinary action could be conceivable.

What is Dinwiddie's response to this claim?

Dinwiddie insists that what he's doing is neither an assignment of his contract to a third-party nor a transfer of his pay to his investors. After all, he isn't collateralizing his contract with the Nets, and he feels that the proceeds he'll use to repay investors fall far outside the league's jurisdiction.

"If I take my money and I choose to pay the investors with money that I already have -- or money that I got from the Nets or money that I sold a house with -- however I choose to pay them back is my choice," Dinwiddie said. "Once the Nets pay me, their jurisdiction on my money is over."

What are some other implications of Dinwiddie's aspirations that could threaten the league?

In conversations with players and agents, they perceive a skittishness about players realizing too much brand value outside the auspices of the NBA. When you consider what Dinwiddie is proposing with his offering, you begin to understand why: If he's able to sell all 90 tokens, he will raise $13.5 million in cash for a season in which he'll earn less than half of that amount post-tax from the team that employs him.

Athletes like to say they "play for the fans." In Dinwiddie's case, his fiduciary obligations to his fans/investors certainly would be comparable to what he owes the Nets. It's easy to see how that could make institutionalists nervous -- and players curious.