Tokenizing Professional Sports Franchises and Other Real World Assets

By David M. Otto

Professional sports teams – as well as art, private equity in “unicorn” or other emerging growth businesses and commercial real estate – have historically been the exclusive province of wealthy and well-connected investors. Realizing access to and liquidity from these investments is beset with several challenges, requiring access to capital that many would-be participants do not have. Tokenization (i.e., the creation and issuance of “security tokens”) of these asset classes offers more investors a pathway for enhanced liquidity and an opportunity to secure an ownership interest in a unique and previously inaccessible “asset class”. By designing and implementing an “on chain” model for tokenizing real world assets, they can be decentralized, thereby democratizing access to and secure transfer of the economic interests and related value that are locked up in these asset classes.

What is tokenization?

Tokenization is the process whereby one transforms ownership in a traditional asset like commercial real estate, art, or sports teams into a liquid tradable digital “smart contract” (i.e. tokens). Tokens are immutable, recorded and secured on a blockchain, and otherwise freely transferable, subject to applicable lock-up or other relevant securities regulations. Pegged to the value of the underlying asset (e.g. a particular percentage of ownership in a sports franchise) on a proportionate basis, tokens can be transacted securely on a blockchain, providing the token holder a platform for securing liquidity and transferring their ownership “stake” in the asset, thereby realizing the underlying value associated with their tokens.

Benefits for owners

Tokenization also addresses the legacy concerns of owners and other interested parties in privately held businesses. Minority owners routinely face issues associated with discounting minority positions when said positions are sold, the illiquidity of the investment, and too limited and otherwise impracticable flexibility built into the traditional pathways for access to an economic stake in various high-value assets. Majority owners, or a group of majority owners, also benefit, as they can retain exclusive and/or voting control of the franchise while also tokenizing a portion of the franchise and, for example, buying out a minority stake.

Benefits for fans

Indeed, tokenization of pro sports franchises in particular offers additional opportunities to strengthen brand loyalty among fans. Not only can a team’s fanbase enjoy the economic benefits associated with the pro sports franchise “asset class”, but fans can also play an active role in how their favorite team operates. By implementing a representative and democratic voting model, which allocates voting rights proportionally to particular token holders and/or a particular token class, pro sports teams can offer their fans the opportunity to participate in the governance of team operations from anywhere in the world. This model enables teams to both grow their fan base and develop long-term, meaningful community engagement among fans with a concomitant and potentially significant economic benefit.

Further, every team, and consequently, each league, can develop real-time and creative opportunities for additional revenue streams, cost savings, and value enhancement. Different token issuances, such as “utility tokens”, may enable teams to offer token buyers the opportunity to acquire and participate in loyalty features, events and benefits, digital collectibles, discounts associated with sponsor promotions and private access to team or league events and/or other related functions. Sponsors could also choose to have an economic interest in the team if they are a “security token” holder.

Making RWA investments more accessible

The economic and transactional limitations of the legacy ownership model for professional sports franchises, as well as other exclusive, high value “asset classes”, compels the adoption of tokenization. Team ownership is highly centralized, illiquid, and confined to a select few with the capital and net worth necessary to acquire some or all of a team. This model – as many sports franchises are experiencing globally – is inefficient, cost-prohibitive, and, particularly with respect to the sale of minority interests, economically punitive.

Tokenizing team ownership can:

• Democratize access to the economic and community benefits associated with this asset class
• Create liquidity (for minority and majority owners) by allowing market participants to buy and sell tokens that represent an ownership “stake” in the team
• Enable teams to both build a loyal local fan base and extend the team brand globally
• Represent a sustainable and accessible model for broadening economic access to, and increasing fan engagement required by, professional sports franchises

It’s time to rethink how we invest

Given the economic concerns and limitations many major sports franchises are facing, as well as current technological capabilities and global interest in this asset class, it is time that the ownership and economic benefits associated with professional sports franchises be more readily accessible, affordable, and transferable. As professional sports franchises become fractionalized and tokenized, the access to, and liquidity associated with, these tokenized assets will create new economic opportunities, re-write valuation models, extend the sports franchise brand, provide more transparent “price discovery” and activate an increase in global wealth creation and distribution for all participants.

Ultimately, it is the fans of pro sports teams and their engagement with the team that creates value for owners. It is time to embrace currently available technologies that enable and support a more decentralized and unburdened mechanism for participation in this asset class, so that those individuals and entities who drive the value proposition associated with professional sports franchises may also reap the rewards. The current centralized, illiquid, and exclusive ownership model requires the interposition of intermediaries, even though the markets can function without them. With the confluence of institutional and widespread individual engagement, technological maturity and an abundance of interesting and potentially lucrative use cases, the promise of tokenization can now be fully realized. It may be unconventional, but it is essential to ensure both the economic viability and ongoing popularity of pro sports franchises while enabling individual access and financial agency.

This article originally appeared in The Digital Chamber in January 2020 and has been updated to reflect new developments in crypto legislation.

About the author: David M. Otto has 38 years of experience in finance and corporate law, mergers & acquisitions, securities, and corporate governance. He is currently the Founder and Managing Partner of the law firm Martin Davis, PLLC, the private equity firm, Otto Capital, LLC, and the venture capital firms, CounterPointe Sports Group, Inc. and CounterPointe Digital Group, Inc. A thought leader on decentralized business models, token economics and capital markets, and securities regulatory compliance, Mr. Otto holds a BA from Harvard University and a JD from Fordham University School of Law.