Cryptocurrency Sponsorships – Balancing Risk vs. Reward – Lexology

Opening new categories of sponsorship allow rights holders to increase revenue and marketing reach – just ask the NFL, which took in $1.8 billion worth of sponsorship deals this year while welcoming the categories of sports betting and liquor. Certainly, coming out of two pandemic-troubled seasons in a row, rights holders need to shore up revenue streams. However, moving into emerging categories can pose risk – not only that the sponsors may not be around long enough to fully pay out on the sponsorship agreement, but also reputational risk for the sports property if the sponsor is subject to controversy.

One such emerging category is cryptocurrency. Per GlobalData, over 200 sports sponsorship deals were done by crypto companies in 2021 (up 488% from the prior year) with an annual value of over $600M, with global soccer being the biggest beneficiary. And while some rights holders have begun to embrace it (for example, the NBA agreed to a 4-year, $192 million deal with crypto platform Coinbase; AEG, the owner of the arena housing the Lakers, Clippers, and Kings, agreed to a 20-year, $700 million naming rights deal with Crypto.com; and several Major League Soccer clubs have primary shirt sponsorships with crypto entities), others, such as the NFL, are taking a wait-and-see stance with respect to sponsorships from cryptocurrency entities.

Perhaps that’s the right approach, as the category has been subject to controversy. Notably, soccer powerhouses Manchester City and FC Barcelona terminated deals with crypto-related companies last Fall shortly after execution once concerns arose about the operation of such companies (Man City, however, just recently announced a new partnership with the crypto exchange OKX,). Hitting closer to home, an investor in crypto company DigitalBits recently sued the company and its founder for fraud and unjust enrichment in New York state court, arguing, among other things, that the company was diverting invested money into expensive sports sponsorships rather than developing its actual business. Dorrell v. Burgio, No. 0657130-2021. (N.Y. Sup. Ct., Compl. filed December 23, 2021)

All of the relevant stakeholders must balance risk versus reward in an emerging, untested category such as cryptocurrency. For cryptocurrency brands, being able to associate themselves with sports leagues and teams (and more importantly, their fan-bases) may justify the big spend for sports sponsorships – but in order to not overreach, consider short-term deals with options to extend. For a rights holder seeking to increase revenue, consider front-loading payments and incorporating strong termination rights in any sponsorship deal – things that could help a rights holder withstand a reputational and monetary hit if an entity in an emerging category such as cryptocurrency goes bankrupt or otherwise runs afoul of the law. Rights holders should be smart about who they do business with and understand the regulatory uncertainty currently surrounding cryptocurrency.

Of course, as with any emerging category, having an established partner in the cryptocurrency space could lead to great things. But like with all partnerships, diligence is required.

Source: https://www.lexology.com/library/detail.aspx?g=d7134648-6863-47b0-b761-caf97f26fbd4