It’s the middle of summer…
Yet we’ve had a crazy last few weeks in the world of college sports and NIL.
And what’s happening there will drip over to pro and youth sports (so it’s worth touching on).
Let’s Dive In 👇
IRS Comes Down on Collectives
A few weeks ago, the IRS released a memo stating that it believes donations made to nonprofit NIL collectives are not tax-exempt.
The memo states:
“It is the view of this Office that many organizations that develop paid NIL opportunities for student-athletes are not tax exempt and described in section 501(c)(3) because the private benefits they provide to student-athletes are not incidental both qualitatively and quantitatively to any exempt purpose furthered by that activity”
Here’s what it previously looked like…
- Create a NIL collective
- Designate it as a 501(c)(3)
- Raise money from donors
- Pay student-athletes $$$
- Give the donor a tax deduction on it
How it lasted this long without getting flagged, I have no idea.
And interestingly…
It’s not just 501(c)(3) collectives that will be impacted by this, but some actual companies.
IRS Memo’s Impact on NIL Companies
With the NIL landscape so new, most of the companies operating in the space are startups.
They need to make money, refine their product/service, fight stark competition, and make decisions on where legislation is headed.
Many of these startups have deals in place with NIL collectives…and some of them are now at risk due to the IRS 501(c)(3) memo.
Take a look at this one company that went dark since the IRS news came out.
Death of Prospex NIL?
I didn’t quite understand the long-term viability of Prospex but the thought process behind the company made sense.
Here’s how it would work:
- A player lists their top 5 schools
- Fans from those schools put money in
- Whatever school the player picks they get 85% of that money
- Fans from other schools get their money back (minus a small fee)
What intrigued me is that Prospex had a partnership with NIL news site On3 — giving them great distribution.
Here’s what Shannon Terry, Founder and CEO of On3 said at the time:
“We are excited to work with Prospex and believe in the long-term value here for high profile high school athletes. We just launched our On3 Athlete Network, which helps athletes to understand their NIL Valuation and help them capitalize on additional revenue opportunities and Prospex is an important part of that.”
However…I don’t think there’s much long-term value here anymore.
Prospex has been in the dark and it looks like the IRS memo might have sealed their fate (as the model is clearly an inducement for pay-to-play).
But some interesting developments out of the collective space could bring it back to life in the future…
Collectives Merging
7 NIL collectives have launched a trade association called The Collective Association (TCA).
So what’s their plan?
- advocate for athletes
- share best practices
- implement an agent registry
- and lobby for state law uniformity
And their immediate priority is to help develop a revenue-sharing model for athletes without requiring employee classification. 👀
If the NCAA was smart, it would get behind this effort…
But I have a feeling the NCAA is more on the side of their typical cronies…the politicians.
Politics Could Hamper NIL
As LIV Golf and the PGA Tour go through the judicial system…
We heard a very strange remark from Senator Rand Paul about NIL:
“Now everybody that plays basketball in college is gonna be driving a Bentley or a Rolls. I mean, we’re gonna be seeing rap stars instead of basketball stars.”
What he’s basically saying:
NIL has completely screwed college athletes. Many of us loved watching amateur sports because the athletes weren’t paid.
There’s a huge disconnect right now between athletes, fans, coaches, athletic directors, presidents, and legislators in college sports.
I mean…
A California bill has stalled after an all-out effort by college sports officials around the country to block it — because the bill has schools sharing revenue generated by football and basketball with all their athletes.
The fact university leaders expect college football and basketball players to subsidize all the Olympic sports is wild.
College = The New Pro
The “new college sports” is this strange gap between high school, prep school, and college.
Overtime Elite crushed it in basketball — and new alternative leagues are going to crush it in other sports.
While it will take some time, everything from pros to 12 years old will be commercialized.
The European club system is what sports will become all over the globe. Just wait until the Saudis start pouring money into youth sports.
Call it whatever you want. Label it as good or bad. However, I think we all can admit that NIL’s downstream impact provides tons of opportunities for athletes, founders, parents, and investors.
Emerging Markets Insight
In new markets that are largely driven by legislation, the risk of conducting business is inherently higher.
One wrong idea or business model can put your entire company in jeopardy.
NIL companies formed in the last few years have raised millions of dollars.
Most of them will fail and their investors will write down a $0. For some, losing a $100,000 angel investment is nothing, for others that can hurt.
Those with asymmetric knowledge in a fragmented emerging market like NIL can not only make better decisions (but more importantly, avoid making bad ones).
If you’re building a company or looking to invest in the NIL space — maybe you should know some people on the inside.
