Investing in Baseball Futures

The New York Times ran a haunting piece last week that detailed American investment in the future salaries of baseball prospects from the Dominican Republic.  See Michael S. Schmidt, "New Exotic Investment: Latin American Baseball Futures,"  NY Times (Nov. 17, 2010).  As the article summed up the financial arrangement:

Recognizing that major league teams are offering multimillion-dollar contracts to some teenage prospects, the investors are either financing upstart Dominican trainers, known as buscones, or building their own academies.  In exchange, the investors are guaranteed significant returns - sometimes as much as 50 percent of their players' bonuses - when they sign with major league teams.  Agents in the United States typically receive 5 percent.

The article also details the greatly varying living conditions at these academies while weighing the advantages and disadvantages they provide for the prospects, who range in age from 13-19 and often "forgo formal schooling."  A professor of international law is quoted as saying that the buscones "are in the business of selling children."  The referenced investments are said to range from $15,000 to $400,00; the investors ranged from a relative of a major leaguer to a former U.S. ambassador.  The Mets' new general manager, who previously helped upgrade baseball operations in the Dominican Republic, is quoted as saying that he "hoped the American investors realized their investments were teenagers, many who will never reach the major leagues."

Which highlights one of the many legal questions occasioned by this surprising fact pattern.  Under U.S. law, it's hard to see this arrangement as anything other than a "security", the next inquiry being whether an offshore, de minimis or other exemption somehow negates the need for registration.  After Life Partners, it took over a decade for federal courts to agree upon SEC jurisdiction over viatical settlements.  If children are truly being exploited (and their U.S. investors not appreciating these and other risks), let's hope the Howey test takes root faster this time.

---JSC, 11/23/10