By Maureen Murat. Esq. and Samson Williams
ABSTRACT. In 2016, President Obama introduced the Jumpstart Our Businesses & Startups (JOBS) Act. Now, via the JOBS Act Regulated Crowdfunding (Reg CF) exemption, existing companies, startups and founders can raise up to $5M from retail investors in a 12-month period. In the year 2022 alone, over $494M in investment dollars was raised from 394,000 people or entities, most of which are retail investors, over 1407 offerings on Reg CF investment crowdfunding platforms, with an average investment check of $1,256.00 dollars. An additional $431M was raised from 107,000 investors using the Reg A+ exemption rules. Under the Reg A+ exemption, startups, founders and existing businesses can raise up to $75M per offering from retail investors in a 12-month period. Into this mix of startup capital we add the nuances of Name, Image & Likeness (NIL). How will Reg CF and Reg A+ investment crowdfunding impact the ecosystem of “student athletes” now that they can raise $5M or $75M before becoming professional athletes, or as is often described as going pro? This article examines how middle schoolers and high school athletes could potentially use investment crowdfunding concepts to fundamentally change how we perceive sports athletes.
AUTHOR. Maureen Murat, Esq. is an attorney licensed to practice in New York, Florida and Washington, DC. She is a Banking Attorney Advisor based in Washington, DC, and Principal of Crowdie Advisors, a boutique firm focused on advising startups and founders on the ins and outs of regulated crowdfunding, cryptocurrencies and other novel digital assets. Maureen was also an adjunct professor in the UNH Franklin Pierce School of Law’s Blockchain, Cryptocurrency and the Law Program. She earned a BS in Psychology from Nova Southeastern University in 2009; MA in Homeland Security from American Military University in 2012; and JD from the University of District of Columbia David A. Clarke School of Law in 2016.
AUTHOR. Samson Williams is a serial entrepreneur, who feels entrepreneurship is so hard, he only recommends it to his enemies. Samson has been an adjunct professor at UNH since 2018, where he was recruited to develop UNH’s Blockchain, Cryptocurrency and the Law Program. Since then Samson has gone on to also develop UNH’s Blockchain and The Space Economy IPSI course. Samson earned a BA in Cultural Anthropology from Florida State University in 2001; MS in Emergency & Disaster Management from American Military University in 2009 and is a proud drop out of Oklahoma State University PhD program in 2011, following the receipt of his first million dollar investment.
In entrepreneurship, theory rarely aligns to practice, as it is feasible to do everything correctly on paper, showing the math in a startup’s Microsoft Excel sheet where the Founder is a bonafide billionaire in twelve months. However, the only way to determine success in entrepreneurship is to go to the intended target market and sell something. And, because theory and practice rarely align in the real world, this article is not written as an academic foray into the theoretical. Rather, this article has been trimmed down to present the reader with the practical, focusing on how an entrepreneur (or twelve year old student-athlete) can leverage Investment Crowdfunding.
With that said, this article is going to introduce the reader, the future sports agent, startup lawyer and/or parent of a twelve year old, basketball phenom or tennis star, to what Investment Crowdfunding is. Once comfortable with the concept, a hypothetical scenario will be proposed where a middle school aged soccer, swim, bowling savant is guided through the process of raising $5M dollars as they head into 9th grade. First, HOW investment crowdfunding works from a practical perspective of forming a business and developing a U.S. Securities and Exchange Commission (SEC) compliant offering will be discussed. Secondly, the art of the possible when it comes to driving eyeballs to a $5M dollar offering will be highlighted. An in- depth discussion into the marketing and socialization of that offering will not be the focus.
Finally, the writers will conclude with thoughts on how the ability for the hypothetical scenario where a student athlete can raise up to $5M dollars via RegCF will impact sports, the notion of amateurism, and of course, how service providers such as lawyers and sports agents play an important role in the process.
Setting the Scene
Adlai “Skoot-la-doot” Ruiz is a twelve year old, 5 '11', 185 lbs quarterback prodigy, who will turn 13 years old, one month after he starts 9th grade at Waller High School, in Waller, Texas. He is fast, lean, with a gunslinger’s arm and according to preliminary doctor reports Adlai is expected to grow to be at least 6’5 by the time he turns 18 years old. Despite hailing from Waller, Texas, a tiny town with the population of 2,796 as of the 2021 census, Adlai is ranked as the #3 freshman high school quarterback in America by the National Prep & Youth Football Association (NPFA).
Adlai’s uncle, Pedro, has heard that people are using crowdfunding to sell non-fungible token (NFT) royalties on their endorsement deals. His nephew has three endorsement deals totaling $150k dollars for his 2024 high school freshman football season. Pedro wants to know whether crowdfunding can be used to raise $2M dollars now, by offering Adlai’s fans and supporters a small portion of his future endorsement deals. In doing the math, Pedro believes that if 2000 people each invest $1000 dollars, they would have $2M to help fuel Adlai’s football development. That would increase his chances of going pro and making real money promoting and leveraging endorsements like Patrick Mahomes who makes $20M a year just off of endorsements. Pedro wonders if this is possible.
What is Crowdfunding?
Crowdfunding is the process of obtaining funding for a project, venture or cause by raising relatively small amounts of money from a large group of people. It is the effort of other people, the crowd, that helps raise the funds needed. Without a large group of people, it is very difficult to raise the desired amount. This is why the “crowd” in crowdfunding is so important. Crowdfunding is also a unifier, community builder and an ecosystem builder. In creating the crowd, the person or entity seeking to obtain funding is also bringing others with similar interests together.
There are five types of crowdfunding that startups can utilize to access capital to grow their businesses. For the purpose of NIL, we will not focus on Donation-based Crowdfunding where individuals or entities seek donations to cover charitable causes generally, anything from field trips to medical bills to helping a business pay its office rent. We will also not focus on Rewards-based Crowdfunding where individuals may either pre-purchase a product or get a perk (or reward) for supporting a project.
For the purposes of this discussion around the intersection of NIL and crowdfunding, we are focused on Regulated (Investment) Crowdfunding, e.g.:
- Equity-based Crowdfunding - Where individuals invest funds and receive shares that represent ownership interest in a company, venture or enterprise.
- Debt-based Crowdfunding - Where individuals lend funds and expect a return on their investment as interest payments or via payment arrangements such as revenue sharing.
- Royalty-based Crowdfunding - Where artists and creators offer their backers a percentage of revenue from the project or venture the backers supported, once it is generating revenue.
What is Regulation Crowdfunding (Reg CF)?
Regulation Crowdfunding enables eligible companies to offer and sell securities through the process of soliciting funds from “the crowd”. A few of the SEC rules include:
- The company must be based in the USA or Canada;
- All transactions under Regulation Crowdfunding take place online through an intermediary that is SEC-registered and approved by Financial Industry Regulatory Authority (FINRA), either as a registered broker-dealer or a funding portal;
- Permits a company to raise a maximum aggregate amount of $5 million through crowdfunding offerings in a 12-month period;
- Limit the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period; and,
- Requires disclosure of information in filings with the SEC, including regular reporting requirements, that is shared with investors and the intermediary facilitating the offering.
Securities purchased in a crowdfunding transaction generally cannot be resold for one year. Additionally, Regulation Crowdfunding offerings are subject to "bad actor" disqualification provisions.
It should be noted that the majority (if not all) of so-called cryptocurrencies, Non-Fungible Tokens (NFTs), and other digital assets (whether blockchain based or not) may be found to be securities that are regulated by the 1933 Securities & Exchange Act and Reg CF rules. “Tokenizing” or “digitizing” an offering does not negate that it is a securities offering, and the act of offering, socializing, or making publicly available opportunities to purchase that financial widget is the act of seeking funding from a crowd of investors (also known as crowdfunding).
When there is investment in a common enterprise, with an expectation of return, profit or financial appreciation on behalf of the crowd purchasing said financial widget, while being derived from others’ efforts, likely means that an investment contract exists, a la the infamous Howey Test. In simpler terms, if you blockchained something and did not offer it to anyone for purchase, it would just be code. What makes it viable, attractive and subjective to wild swings in pricing and valuation is the act of offering that line of code to the public (read crowdfunding) for investment in something.
This is an important fact to be aware of when discussing funding options for NIL participants, as all of their deals or offerings will be offered to fans, their community, sports bettors and speculators. As such, whether the terms of that offering were memorialized as NFTs, shares or royalties they may nonetheless be investment schemes subject to SEC crowdfunding rules.
Name, Image & Likeness (NIL)
On June 30, 2021, the National Collegiate Athletic Association (NCAA) Division 1 Board of Directors approved an interim name, image and likeness (NIL) policy. This new policy allows all NCAA D1, D2 and D3 student-athletes to be compensated for their NIL as of July 1, 2021, regardless of whether their state has a NIL law in place or not. On October 26, 2022, the Division 1 Board provided clarifications for the interim policy.
As of February 2023, no student-athlete has combined NIL and Regulation Crowdfunding to offer their fan base the opportunity to become fanvestors (fans + investors).
Recent NIL Deals
NIL deals vary in value, depending on a variety of factors such as the market or school size, type of sports or, sadly, gender. Since the inception of NIL in July of 2021, football players have seen some of the most lucrative NIL deals. Below is just a sampling of NIL deals courtesy of On3 to give the reader an idea of the cash flow that NIL deals are providing student-athletes.
- Mohamed Ibrahim, Running Back, University of Minnesota Golden Gophers, teamed up with Gushers, a General Mills product, for an NIL deal. According to On3's NIL Valuation, Ibrahim is worth $458,000.
- Quinn Ewers, Quarterback, University of Texas Longhorns, partnership with Wrangler jeans. Amount: Undisclosed. Before his undisclosed Wrangler deal Quinn decided to join college a year early just to strike a $1.4 million deal with GT Sports Marketing, according to ESPN. Ewer's On3 NIL Valuation is $779,000.
- BiJan Robinson, Running Back, University of Texas Longhorns. Prior to the start of the 2022 season, Robinson released a gourmet Dijon mustard called "Bijan Mustardson. Robinson has an estimated annual NIL valuation of $1.8 million, the 4th-highest in college football, which include deals made with companies such as C4 Energy and Lamborghini Austin.
- Decoldest Crawford, Wide Receiver, University of Nebraska. Thanks to a deal with SOS Heating & Cooling — an Omaha-based heating, ventilating, and air conditioning company, Crawford has an annual NIL valuation of $83,000, according to On3.
The Scenario Part I: Structuring the Crowdfunding Offering
How can a middle school football phenom headed to the 9th grade potentially raise $2M dollars by leveraging their bran? They can use Reg CF crowdfunding to raise the money from her or his fans. How the deal is structured should, of course, be well planned out with a qualified securities lawyer, especially given that as of publication of this article (March 2023) no such NIL/Reg CF deal has ever been accomplished. WIth that said, here are five key questions to answer when structuring such a deal:
- What type of crowdfunding offering works best for Adlai “Skoot-la-doot” Ruiz? For this scenario, Skoot-la-doot’s fans are being offered an opportunity to receive a percentage of revenue from his future endorsement deals. The funds will be raised via a Royalty-based Crowdfunding campaign.
- What percentage of royalties will fans be entitled to based on their level of investment? Keep in mind that this is a business deal and that investors are generally investors first and fans second. Be sure to make the potential ROI (return on investment) attractive to both die hard fans and curious investors.
- What business structure will fanvestors be investing in? In this instance, for Royalty-based crowdfunding, the business will be called Skoot-La-Doot is Going Pro, LLC. Were this an Equity Crowdfunding offering, his team would consider creating a corporation.
- Given that Skoot-la-doot is a minor, how should the LLC be structured?
- How can Skoot-la-doot best explain the speculation and risks involved in this Royalty-based crowdfunding deal to his fanvestors?
- Bonus - Who will develop the FAQ section of the offering that explains what happens to investors' money in the event of injury, academic disqualification or the campaign fails to raise the full $2M dollars?
The other key question to determine in the offering is, “For how long will investors be entitled to royalty payments stemming from Adali’s endorsement deals?” Will it be just for the 2024 season? Or will this be a multi-year or lifetime royalty deal? Given that Adlai is projected to go pro and could potentially be making hundreds of millions of dollars over the lifetime of his football career, would Adlai be willing to potentially give up tens of millions of dollars to his fanvestors? On the other side of that debate is the fact that fanvestors may be even more likely to fully fund his initial royalties based crowdfunding campaign for $2M dollars, considering that Adlai may make $10M or $30M dollars a year from endorsements during an NFL career that could be as long as Tom Brady’s. It is evident that there are a few speculations as with any investment.
The Scenario Part II: How the Campaign Money Flows
Adlai’s Uncle Pedro, is Skoot-la-deut is Going Pro, LLC’s managing member and has reviewed the 80+ FINRA regulated crowdfunding platforms and selected Silicon Prairie Capital Partners, https://sphi.io/. Silicone Prairie was selected for their ability to place an “Invest Now” button directly on SkootLaDeut.com’s website, thereby ensuring that Adali benefits from the foot traffic, SEO and ability to capture and engage and sell merchandise to visitors to his business website.
After much discussion and preparation, the royalty crowdfunding deal was scheduled to go live five minutes before Adlai’s first high school game with Waller High School Bulldogs, against local Houston, Texas crosstown rival the Tomball HIgh School Cougars. A QR code will be shown on the jumbotron offering all attendees the opportunity to invest in Adali’s royalty based crowdfunding campaign. As part of the crowdfunding campaign, certain perks have been offered to the individuals based on the investment amount they make. Perks levels include:
- Minimum investment of $108.00 dollars
- Maximum investment of $250,000.00 dollars
- Perk Level 1: The first one hundred investors who invest a minimum of $500.00 will receive a custom Skoot-La-Doot is Going Pro commemorative t-shirt.
- Perk Level 2: The first one hundred investors who invest a minimum of $1,000.00 will receive the aforementioned perk + an NFT indicating what number investor they were.
- Perk Level 3: The first one hundred investors who invest a minimum of $5,000.00 will receive the aforementioned perks + a custom, autographed, physical rookie card.
- Perk Level 4: The first fifty investors who invest $10,000.00 will receive all of the above and invites to private combine practices, prior to Adlai going pro.
- Perk Level 5: The first five investors who invest a minimum of $50,000.00 will receive all the perks before and an invite for themself and three guests to Adali’s NFL Rookie Draft Party with Adali and his family on Draft Night in approximately 2032.
- Perk Level 6: For the investor who invests $100,000.00, they will receive all of the aforementioned perks, plus Adlai’s game jerseys for his first high school, college and NFL games.
Core to the Royalty-based crowdfunding campaign is investors understanding what they could potentially receive for their investments. Adlai is offering 15% royalty for his potential lifetime endorsement deals, from high school to five years after he officially retires, to all his investors, based on the amount of money they invest into his crowdfunding campaign. During his high school years this could be 15% of $150k a year; potentially growing to 15% of $1M to $3M during his college career. However, should Adlai make it to the NFL, as a first round draft pick, he could earn as much as $10M to $20M a year in endorsements. At which time, his initial Royalty-based crowdfunding backers would still be entitled to 15% of that annual amount, proportional to their original investment amounts and any applicable taxes.
In this instance, Adlai’s first game of high school is sold out with over 20k fans in the stadium prior to kickoff. There has been a huge social media buzz given this is the first of its kind NIL + RegCF deal for a “once in a lifetime” football phenomenon dubbed the “next Tom Brady”. The game is being streamed on ESPN2 and potentially millions of football fans will see Adali’s investment QR code and RegCF deal when it is shared five minutes before kickoff. In this scenario, creating and building the sense of FOMO (Fear Of Missing Out) could easily result in Adlai’s $2M dollar deal being oversubscribed in less than sixty seconds. Oversubscribed meaning that so many investors clicked on the QR code and invested that Adali raised over the $2M dollars crowdfunding goal. Raising more than the initial goal of $2M dollars is fine, as in RegCF crowdfunding Issuers can raise up to $5M dollars, per offering, per 12 month period. Additionally, for those the SEC considers accredited investors andi football fans, there is no limit on how much they can invest, unless that limit is imposed by the Issuer. Retail investment limits are generally limited for non-accredited investors because both their annual income and net worth per year are considered. If you are a non-accredited investor, then the limitation on how much you can invest depends on your net worth and annual income. If either your annual income or your net worth is less than $124,000, then during any 12-month period, you can invest up to the greater of either $2,500 or 5% of the greater of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $124,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is greater, but not to exceed $124,000. The following table provides a few examples: https://www.sec.gov/oiea/investor-alerts-bulletins/ib-crowdfunding#:~:text=If%20both%20your%20annual%20income,but%20not%20to%20exceed%20%24124%2C000.
In this scenario Adali has placed a limit of $250k dollars, to limit the number of sharks, whales and football boosters and increase the number of fanvestors.
Note that in many crowdfunding deals, in order to ensure more of a crowd of fans, a $100 dollar maximum investment limit is set, as in the example of Bucket List Studios. Bucket List intentionally set the maximum investment amount at $100 dollars per investor, regardless of if they were an Accredited or Retail investor. As a result Bucket List Studios had 28,915 one-hundred dollar investors help them raise their goal of $2.89 million dollars for their cartoon animation studio.
Potential Costs for Raising Money via Royalty-based Crowdfunding
These are approximations and actual costs may vary. Generally, though, below are the high ticket expenses for launching a crowdfunding deal:
- $3k to form the LLC.
- $5k to $20k for a lawyer to structure the deal and complete the FORM-C.
- $100 to $20k for a marketing video (this may be less than $100 dollar depending on how many people follow Adlai on TikTok, Instagram, Twitter and social media as a whole).
- $100 to $50k marketing the deal, driving awareness about the deal. Again this cost may be negligible if Adali is already receiving press/media coverage as part of his sports performance. As a result, we anticipate that many NIL student-athletes will have net positive cashflow from selling merchandise and gaining endorsements while advertising the opportunity to invest in their offering.
- 2% to 7% crowdfunding platform fee. The crowdfunding platform that executes the deal will charge the Issue between 2% and 7% of the raise, following the close of the campaign. In this hypothetical scenario Adlai would pay Silicone Prairie 3% of $2M ($60k) dollars, after his campaign closes; as well as any other administrative fees associated with the campaign.
In general, if you do not have a large fanbase or social media presence an Issuer should expect to spend 10% of the desired raise amount, up to the first $1M dollars to attempt to raise their goal. By the way, an “Issuer” is anyone seeking to raise funds via crowdfunding; an issuer issues securities. After the first $1M dollars, the expense to raise funds tends to drop. In this scenario, given Adali’s existing media coverage and attention, an Issuer in this or a similar position should expect to incur minimal paid advertising costs as the bulk of their funding comes from their existing earned marketing network and fan base word-of-mouth investments.
RegCF and NIL: The Coming Shockwave
- Can student-athletes earn money from endorsement deals? Yes.
- Can student-athletes use RegCF investment crowdfunding to form ventures that enable their fans to invest in their sports careers? Yes.
- Do sports fanatics who routinely shell out hundreds of dollars for shoes and thousands of dollars for seats to games, have an appetite for investing in their favorite player? TBD
Our prediction is that prior to the 2024 season, amateur sports will have its very first Reg CF + NIL deal. It will most likely be in college basketball with the athlete's campaign going live minutes before their NCAA March Madness Sweet 16 game starts. Tens of millions of sports fans, hundreds of thousands of their personal fans, tuned in to watch them play and be presented with the opportunity to invest in their future success. Is there a more emotional driver on the planet than the energy of twenty-thousand fans packed into an arena, chanting their icon’s name? Then to add to the bedlam, the crowd begins to count down from 5, 4, 3, 2, 1 prior to scrambling to going to their favorite student-athlete’s website and memorializing their love (regardless of the risks and odds of failure of the campaign or their odds of going pro) for the game, that player and how they make them feel by investing whatever the legal limit and their bank accounts allow?
How will the future of NIL and Reg CF change sports? Imagine if in 2012, LaVar Ball, founder of Big Baller Brand, could have used Reg CF to raise $2M dollars, every year, for Lonzo, LiAngelo and LaMelo Ball’s basketball career? What happens when super sports agent Jim Tanner, Founder of Tandem Sports and Entertainment, meets the next Ja Morant…whose “Uncle Pete” has already raised $3M dollars for him as a 10th grader? More importantly, as student-athletes fully embrace their ability to mingle their social media presence with the ability to convert social capital into financial investment, how will that impact sports agents as a whole when they are no longer the sole gatekeepers to sports wealth? And have to compete with FINRA regulated crowdfunding platforms? The thing is, it's not the parents or uncles of student-athletes that sports agents have to be wary of; it's the FINRA regulated crowdfunding platforms who may be positioning themselves as the new gatekeepers of student-athlete wealth.
This article highlights what could be if the world of investment crowdfunding and NIL intersected. There’s no clear path yet, but the rise of NIL deals and professional salaries are an indication that the possibilities are abundant.
For more insights into the intersection of RegCF and NIL, reach out to Maureen@CrowdieAdvisors.com