Crowdfunding and Sport: How Soon Until the Fans Own the Franchise?

Posted on Categories Corporate Law, Legal Scholarship, Public, Sports & Law

Jamaika-BobThe latest issue of the Marquette Sports Law Review is now available online.  This is a faculty symposium issue.  I am proud to have my article, “Crowdfunding and Sport: How Soon Until the Fans Own the Franchise?,” included in this issue.  Here is the introduction.

The Green Bay Packers football team operates as a nonprofit corporation that has been publicly-owned since 1923.  Since that time, the franchise has raised capital by selling shares of stock in five different stock offerings, and there are currently over 350,000 individual members of the public who are shareholders of the team.  These shareholders are the joint owners of a sports franchise that is currently valued at $1.375 billion.

The public ownership of the Green Bay Packers is often noted in the media, and it is generally praised for contributing to the team’s strong tie to the surrounding community.  However, it is highly unlikely that any other N.F.L. team will follow in Green Bay’s footsteps.  Public ownership of franchises is actually prohibited under the current N.F.L. Constitution, and Green Bay’s ownership structure persists solely because of a grandfather clause that excludes the Packers from the prohibition.  Moreover, the unique nature of the Packer’s public ownership structure extends beyond the boundaries of the N.F.L.  The Green Bay Packers are currently the only wholly publicly owned franchise among all of the four major sports leagues (football, baseball, basketball and hockey) in the United States.

There is no reason why publicly owned professional sports teams cannot thrive and succeed at the same level as privately owned teams.  While public ownership of professional sports teams is relatively rare in the United States, it is common overseas.  Notable examples of publicly owned soccer teams are Real Madrid and Barcelona FC, both of which play in Spain’s Liga Nacional de Fútbol Profesional, commonly known as “La Liga.”  These teams are operated as “socios,” a form of nonprofit organization where fans of the club pay an annual membership fee for the right to buy season tickets in a special section of the stadium and the right to vote on certain management decisions.  Another team that plays in La Liga, Real Oviedo FC, has maintained consistent and significant numbers of public owners despite the relative disadvantage of being based in the region of Asturias, far from Spain’s major population centers.

It is not just that the United States lacks more than one example of a major league team that is wholly owned by the public.  It is also uncommon for American major league sports teams to have a minority ownership stake comprised of public shareholders.  In recent decades, the private owners of several major league franchises have experimented with establishing and maintaining a publicly owned minority stake, seeking to inject additional capital into their team whilst still maintaining control over the enterprise.  However, in each instance the private ownership group used a stock offering in order to create a minority interest, only to subsequently abandon the structure and negotiate the sale of the entire team to new owners.  For example, the Cleveland Indians baseball team held a public offering of shares in 1998 but went wholly private again in 1999.  The Boston Celtics basketball team had a longer run with minority public shareholders, holding a public stock offering in 1986 but eventually reverting to wholly private ownership in 2002.

Today the ownership of major league sports teams in the United States remains almost exclusively the province of large corporations, wealthy individuals or ownership groups comprised of these same two actors.  What explains the failure of more major league teams to pursue and maintain some component of public ownership?  Certainly, the increased public scrutiny of team and owner finances that comes with public ownership can act as a deterrent.  However, the biggest barrier to public ownership may be the combination of high valuations of professional sports teams, which today can run into the billions of dollars, and the effort and expense necessary in order to sell large amounts of stock through the public markets.  Simply put, buying a majority or minority stake in a major league team requires raising a great deal of money, and the traditional method of selling stock to the general public through a registered public offering adds significant legal, accounting and underwriting fees on top of the amount to be raised.

Recently, some commentators have pointed to crowdfunding as an innovative capital raising technique that could be used to create more publicly owned sports teams in the United States.  “Crowdfunding” is the term used to refer to raising significant amounts of capital by taking advantage of the world-wide web: funds are solicited in small amounts from a broad segment of the general public using the vehicle of the internet.  Private individuals and entrepreneurs have been turning to crowdfunding in recent years in order to raise money for a variety of profit-making enterprises, such as the creation of digital music, movies, and small businesses.

In the sports world, crowdfunding has become a popular fundraising vehicle in several contexts.  It rapidly has become one of the primary means whereby individual amateur athletes solicit donations in order to support their training and competition costs.  It is also increasingly being used by amateur and professional sports teams in order to raise money and build community ties.  In one instance, crowdfunding was an integral part of a fledgling professional football league’s business plan to create eight franchises, each one with a public ownership component.  Crowdfunding was even advocated as a way for the general public to remove Donald Sterling as the owner of the Los Angeles Clippers basketball team, by providing the funds necessary for the purchase of the team.

This article will discuss the future potential and limitations of crowdfunding as a means of financing the public ownership of professional sports teams in the United States.  Part II of the article explains the different models of crowdfunding (pure donation, reward/membership, and equity-owner) and the legal environment that applies to each model, including provisions of the federal securities laws that until recently have constrained the use of equity crowdfunding.  In Part III, this article examines the changes enacted by the federal JOBS Act, as well as recent developments in state law.  These reforms were intended to lessen the legal constraints on crowdfunding when used to sell ownership shares in a business.  Whether or not these legal reforms will prove sufficient to inspire more professional sports teams to sell stock to the public is the subject of Part IV.  Finally, Part V of this article concludes that, while it is unlikely that the Green Bay Packers will be joined by any other major league teams with public shareholders, the adoption of minor amendments to the JOBS Act and to state law could facilitate the use of crowdfunding in ways that lead to the increased public ownership of sports teams in the minor leagues or in newly created professional sports leagues.  In this way, crowdfunding eventually may allow the fantasy of many fans – to be an owner of the team that they root for – to become a reality.

Click here to download the entire article.

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