NFT’s De-Fi, Metaverse – What’s Next?

NFT’s De-Fi, Metaverse – What’s Next?

The pandemic led to the sports and gaming industry witnessing several (older ones grew by leaps and bounds and newer ones gained popularity) alternate sources of revenue, i.e., online fantasy sports, casual and card gaming and esports (or video games, as casually called). This propagated a version of technological evolution that only a few could have imagined. Combine the two, and the race has now stepped into an altogether preposterous territory of decentralized token-based economics vide the block chain technology or as coined, the Web 3.0 Technology.

What is Web 3.0?

To understand Web 3.0, one needs to first understand both, Web 1.0 and Web 2.0. Web 1.0 refers, roughly, to the period between 1991 and 2004, where most websites consisted of static pages, and a vast majority of users were consumers of the content and not the producers. Thereafter, Web 2.0 began around 2004, which was based upon the idea of ‘the web as platform’, i.e., uploading of user content through mobile phones, social media handles and cloud webs. Nevertheless, Web 2.0 came with its’ own set of issues – when the number of clicks equal revenue, there is no incentive, per se, to tell the truth. The result was clickbait, misinformation, fake news and ad-blockers. The trust issues that developed overtime led to the introduction of the Web 3.0 technology in 2014 – a vision for the next phase of the internet’s development that imagines a decentralized ecosystem based on blockchain technology. It gained immense popularity and interest, in 2021, courtesy the cryptocurrency enthusiasts, large technology companies and venture capital firms. While some are of the opinion that Web 3.0 provides increased data security, scalability and privacy for users, others have often raised concerns about the decentralised web, citing the potential for low moderation and the proliferation of harmful content as reasons.[1]

This new-age concept envisioning a decentralized internet with advanced functionalities, owned by builders and users, has conveniently, amongst other industries, paved its way into the field of sports and gaming. Previously, the industry was perceived in a conservative context, wherein technological advancements usually received a backlash from the stakeholders, thereby attracting minimal investment or hesitance in introducing new technology. However, in the contemporary world, for the unique characteristics that the industry offers – unmatched loyalty, mass market appeal and a high tendency towards marketability, the economic demography of sports and gaming has changed. A large number of brands, sponsors, technology providers or other similar entities, with massive commercial interests, have come to utilise sport and gaming as a medium to leverage data-driven products, thereby resulting in a shift i.e., diverting sports and gaming to the forefront of new technology and data trends. Simply put, the market is using the Web 3.0 technology as a progressive process to extract the economic value from the industry by creating transformational business offerings, viz. providing value for the most significant consumers – fans – via gamification[2] or tokenization.

Some of the applications of Web 3.0 include payment methods, smart contracts, digital coins/currency, NFTs (non-fungible tokens) and even video games. By moving away from traditional ways of merely uploading content online, the application concentrates on turning people into more engaged users, i.e., a form of shareholding, by earning tokens on the blockchain system and thus, gaining influence on how things are operated.[3] However, this is still egalitarian, as it is only the venture capitalists and the likes, financing such innovation with altruistically emphasizing on sustainability but nonetheless, covered by the capitalist notion of ‘where there is money, there is greed’.

[1]Harbinja, Edina; Karagiannopoulos, Vasileios (March 11, 2019). “Web 3.0: the decentralised web promises to make the internet free again”. The Conversation. Retrieved November 9, 2021.

[2] principle of applying game elements to non-game-related activities

[3]Available at:

<https://www.euronews.com/next/2021/12/27/nfts-web3-defi-and-metaverse-your-guide-to-the-tech-buzzwords-from-2021>

For instance, a16z, a venture capital (VC) fund and one of the biggest champions of the Web 3.0 concept, has over $3B in assets under management in crypto-related portfolio companies.[1]

What is in it for the stakeholders, other than the likes of VCs.

  • Athlete Branding – Athletes increasingly drive commercial and marketing appeal, leveraging their sporting performance and personalities as a bridge to capitalize on their personal brands and expand their own content and product offerings[2]. Michael Jordan, for instance, recently announced Heir, a blockchain-based social platform where members gain exclusive access to athlete-generated content and merchandise.[3]
  • Digital Collectibles and Fan Engagement – It has been traditional fan behaviour to keep photos, posters and trading cards; now everything is kept online. Fan engagement vide Web 3.0 services is significant for sports rights holders, creating a differentiation aspect, helping gather proprietary data on fans, delivering new products, services, and experiences and hence boosting revenue generation options for the entities[4].
  • Gamifying Museums – Museums have started gamifying their exhibits bringing together multiple technologies. Sporting entities are currently working with museums to create immersive role-playing game experiences where visitors select characters on an app, before arriving, and are challenged to collect digital memories along their route through the exhibition, which are later rendered into digital collectibles.”[5] For instance, Infosys has announced that it is working with the French Tennis Federation to welcome the new era of tech-driven sports viewing and fan engagement – the organizations are beginning their fifth year of partnership in the fields of 3D, AR, VR and AI to power experiences.[6] Not only this, mega international level tournaments are being conducted on the metaverse esports museums[7].
  • Virtual Stadiums – Entities such as football clubs ( Manchester City and Sony) are partnering with digital platforms to build virtual stadiums using the hawk-eye, image analysis and skeletal-tracking technologies. Alternatively, players can manage their clubs and generate income, by earning cryptocurrencies, while playing at virtual stadiums in metaverse.[8]

Is the world ready for the legal issues brought to the fore thanks to the advent of the Web 3.0 technology?

Although it may be too early to estimate the long-term impact of Web 3.0 on the business of sports and gaming, the current form of it draws attention to several legal concerns:

Licenses – While the users own the token, they only have a license to the digital asset associated with the token and it is the copyright owner who retains the copyright. Hence, while licensing the intellectual property, it is important to understand what can be or not be licensed. Entities selling physical products must revisit their licensing strategies to ensure protection of the digital objects rooting from the physical ones.

[1] Available at: <https://a16z.com/crypto/#vertical-landing-investment-thesis>

[2] Available at: <https://kennethcortsen.com/nba-lebron-james-global-branding-basketball/>

[3] Available at: <https://www.sportspromedia.com/news/michael-jordan-jeffrey-heir-blockchain-technology/>

[4] Available at: <https://www.sportbusiness.com/2021/08/cutting-through-the-noise-why-sports-need-to-own-the-fan-engagement-journey/>

[5] Available at: <https://www.beyondgames.biz/22142/museums-move-to-the-metaverse/>

[6] Available at: <https://www.businessworld.in/article/Infosys-and-Roland-Garros-Push-For-Innovation-In-Technology-Driven-Sports-Viewing-And-Fan-Engagement/01-06-2022-430882/>

[7] Available at: <https://www.superpixel.com/article/81722/rng-hosted-their-msi-competition-metaverse-e-sports-museum-lantern-dao>

[8] Available at: <https://www.outlookindia.com/business/manchester-city-barcelona-among-four-football-clubs-enter-metaverse-to-engage-fans-news-188120>

[1] Available at: <https://a16z.com/crypto/#vertical-landing-investment-thesis>

[1] Available at: <https://kennethcortsen.com/nba-lebron-james-global-branding-basketball/>

[1] Available at: <https://www.sportspromedia.com/news/michael-jordan-jeffrey-heir-blockchain-technology/>

[1] Available at: <https://www.sportbusiness.com/2021/08/cutting-through-the-noise-why-sports-need-to-own-the-fan-engagement-journey/>

[1] Available at: <https://www.beyondgames.biz/22142/museums-move-to-the-metaverse/>

[1] Available at: <https://www.businessworld.in/article/Infosys-and-Roland-Garros-Push-For-Innovation-In-Technology-Driven-Sports-Viewing-And-Fan-Engagement/01-06-2022-430882/>

[1] Available at: <https://www.superpixel.com/article/81722/rng-hosted-their-msi-competition-metaverse-e-sports-museum-lantern-dao>

[1] Available at: <https://www.outlookindia.com/business/manchester-city-barcelona-among-four-football-clubs-enter-metaverse-to-engage-fans-news-188120>

  • Avataar Issues – Gamifications and museums use avatar based characters, which are highly likely to invite law suits, including those pertaining to image rights and other intellectual property related issues, with brand and third party rights used in avatars through which services are performed in the metaverse.
  • Governance, Marketplace and Regulations – Digital marketplaces require customized terms of service depending on the type of marketplace and consideration of and compliance with regulatory issues, especially when there is absence of one in a jurisdiction like India.
  • Gambling – It has been observed, in jurisdictions outside India, that several gaming entities have been sued for allegedly engaging in gambling activities due to virtual goods that can be won (with some element of chance) and traded on unauthorized secondary markets. Most have failed because winning items that can only be used in-game (and not convertible to money or other value) typically are not deemed a prize of value. Many of these cases were dismissed, largely because the game companies’ terms of service prohibited the sale, transfer, or exchange of the virtual goods (including via secondary markets) and the game companies did not partake in or facilitate secondary markets.[1] When these tokens are won, the result may be different since they can be sold on exchanges for a value. With the debate around games of skill and chance in India, coupled with the absence of strict laws around cryptocurrency, the entities must entirely be aware of the grey area they are entering into.
  • Virtual advertising – One major source of revenue on the metaverse is through advertising. The entities in the virtual space own or lease the virtual land using the tokens and branded virtual items to promote and market their products and services. Avatar based influencers are employed to further glorify the event, participate in sponsored events and engage in other metaverse activities. Constant checks on the regulatory mechanisms pertaining to advertisements are necessary, especially to the extent of gaming laws in India wherein stakes are involved.
  • Privacy and Data Protection – Identity verification and identity theft becomes the primary focal point of entities engaging in businesses in the metaverse, since it offers several anonymity and other security features. The vulnerability in the present version of the technology is such that there will be a constant need for stricter and more transparent privacy standards vis-à-vis the prevailing ones in the pipeline in India, as the cybercriminals will continue to exploit the existing loopholes in the metaverse in the absence of stricter and adequate regulation.
  • Technical and Functional Issues – With game controllers, VR gadgets and 1-to-1 motion controls, the sports and gaming industry in the Web 3.0 bay offer a vast array of options to users. However, due to lack of access and literature, it is difficult for the users to keep up with the pace and understand the magic of the technology – leading to gradual loss of interest and financial drop. With such drop, the partnership between the tech-developers and the sellers goes for a toss and thereby, result in several legal and financial challenges restriction in fulfilling guaranteed obligations, payment issues, IP issues, to name a few.

Conclusion

Being at a nascent stage, coming to a conclusion, already, on the legal implications of the Web3 industry is too preliminary and would be based on half-baked information, nevertheless it raises significant questions pertaining to the suitability and application of certain technologies in the realm of sport and gaming, either as sustainable, valuable, and/or ethically sound infrastructure or market offerings. There exists a constant struggle between what some of these technologies really are and what benefits they offer on one hand, and the perceptions and expectations of fans, consumers and IP owners on the other.

[1] Available at: <https://www.natlawreview.com/article/are-you-ready-web30-and-legal-issues-it-will-bring>

With the constant due diligence and misrepresentation-related challenges that Web 3.0 posses, not all commercial deals have found so much early fortune. For instance, both Manchester City and FC Barcelona recently terminated their partnerships with Web 3.0 companies. The industry constantly serves as a reminder of the potential risks of brand association for sports rights holders, as well as the fact that partnerships may require at least some level of authenticity in shared values, understanding, acceptance and participation from fans in order to be successful. Similarly, IQONIQ, a fan engagement platform that had also partnered with multiple sport properties worldwide, recently went into liquidation, leaving IQONIQ’s partners stranded and reducing the value of users owning fan tokens to virtually zero.[1] Recently, it was also reposted that Nike has filed a lawsuit against online reselling platform StockX in a federal court in New York over unauthorised NFTs. It is alleged by Nike that StockX sells virtual products using Nike’s trademarks, without consent, and more than 500 Nike-branded vault NFTs said to have been sold so far.[2] Entitling digital assets as passive, Warrant Buffet, stuck to his sceptical stance on cryptocurrency at the Berkshire Hathaway annual shareholder’s meeting and stated that these are not productive assets as they do not produce anything tangible. Another investor, Mr. Charlie Munger, went on to state that “in my life, I try and avoid things that are stupid and evil and make me look bad in comparison to somebody else – and bitcoin does all three”.[3]

While it is indeed a risky move, as a forward step, Web 3.0 enables several openings not only for fan-watching, but also for fan-experiencing – which alone attracts positivity, motivation and a large share of revenue for all the stakeholders involved – a probable win-win for all.

[1] Available at: <Iqoniq liquidation fuels calls for regulation on crypto sports sponsorships – SportsPro (sportspromedia.com)>

[2] Available at: <https://www.retail-insight-network.com/news/nike-stockx-lawsuit/>

[3] Available at: < https://www.cnbc.com/2022/04/30/warren-buffett-gives-his-most-expansive-explanation-for-why-he-doesnt-believe-in-bitcoin.html>

[1] Available at: <Iqoniq liquidation fuels calls for regulation on crypto sports sponsorships – SportsPro (sportspromedia.com)>

[1] Available at: <https://www.retail-insight-network.com/news/nike-stockx-lawsuit/>

[1] Available at: < https://www.cnbc.com/2022/04/30/warren-buffett-gives-his-most-expansive-explanation-for-why-he-doesnt-believe-in-bitcoin.html>

Fan Tokens – An Addition, or a Solution, to the Monetary Misery?

Fan Tokens – An Addition, or a Solution, to the Monetary Misery?

Lionel Messi’s transfer to Paris Saint-Germain (PSG) was in itself a massive commercial attraction, however, what added more to it was the initiation of financial structure, previously unheard of for a transaction of this nature, i.e., a one-off payment (as a part of his salary), understood to be worth around 1 million euros ($1.15 million), made in PSG “fan tokens”. The conversation around the manner in which the sporting world is evolving in the virtual space of ‘blockchain’ and ‘metaverse’ is like having a discussion about what “the internet” meant in the 1970s. The building blocks of a new form of communication were in the process of being built, but no one really knew what the reality would look like. While it was true, at the time, that an unknown idea called “the internet” was emerging, not every concept of what it would look like turned into reality. Similarly, there is also a lot of marketing hype wrapped up around the idea of the fan tokens, which is a rather broad shift in how sports fans interact with clubs using technology. Remarkably, as of January, 27th 2022, the market cap of these fan tokens was US$ 298,957,896/- with a 24-hour trading volume of US$40,722,163.[1]

Tersely put, fan tokens are a form of Utility Tokens[2] that entitle the token holders with a variety of fan-related connexion prerequisites. These tokens are generally used by sports clubs and music fan clubs to organize unique experiences for their fans, establish club leadership, goodwill and more. For instance, in the event a sporting entity issues fan tokens, the perks attached to such tokens would allow the holders to participate in non-managerial decisions of the sporting entity, such as voting on merchandise design, team bus design, official team anthem, etc. These tokens also come with a bag of rewards and other unique experiences such as tickets to the team’s home games, complementary jerseys, etc. [For the purpose of this article, the author shall stick to sporting entities only].

Sporting entities and fan token issuing entities collaborate and issue the fan tokens deploying a smart contract, on the market feature in which the issuing entity has its presence, based on their internal arrangement. While it’s a collaboration between two entities, it is the sporting entity that decides what rights and entitlements must be given to the token holders, and the issuing entity assists the sporting entity in suggesting the nature of rights to be granted, with their knowledge and expertise in the said demography. Both parties’ issue surveys and polls respectively, for the fans to understand the nature of engagement preferred by the fans and thereby vote on their choice of question raised and engage with the sporting entity accordingly. The terms and conditions of such polls and surveys (binding or non-binding on the sporting entity) are also laid out jointly by these two collaborators, ensuring best measures for the fan engagement.

These tokens are issued via a fixed base price process, referred to as the ‘Fan Token Offering’, which are then traded on exchanges, where their value keeps fluctuating. They can be bought for fiat currency or cryptocurrency, and are never ‘spent’, so the holders’ balance only decreases if they decide to sell or if they exchange them for another and are locked once they are used for voting for the duration of the aforementioned poll.

[1] Information accessed and borrowed from <fanmarketcap.com>.

[2] A Utility Token provides access to the goods and services that an entity has launched or will launch in the future, which can be used as a type of discount or premium access to the services offered. Such tokens are intended generally as a funding mechanism camouflaged as a marketing strategy to attract and increase user engagement.

It’s difficult to parse what this exactly means because when you hear descriptions like those above, an understandable response is, “Wait, doesn’t that exist already?”. Sporting entities, have in the past, involved fans vide polls for stadium experiences, merchandise offerings, player rankings, etc., but is that what fan tokens really mean? Yes and No. Identifying former sporting entity polls as “fan tokens” would be comparable to identifying Google as the “internet.” Even if a fan, theoretically, received significantly similar belongingness with the sporting entity i.e., socializing, buying things, engaging and playing games/polls, it wouldn’t necessarily mean that the prevailing fan polls encompass the entire scope of fan tokens. Categorically put, fan tokens are digital assets that must be purchased for ownership and participation, which fluctuate in value, and have more merit in it, as the token owners receive perks and can occasionally vote on minor decisions (binding surveys and polls) to be taken by the sporting entity.

But it is worth the investment and hype?

Recently, European football’s governing body, UEFA, announced a sponsorship deal with Socios.com, a cryptocurrency company which sells fan tokens, which can only be bought through its own blockchain called Chiliz. Not only UEFA, seventeen of England’s 20 Premier League clubs have at least one commercial deal with a company engaged in the cryptocurrency sector, with six, including Arsenal and Manchester City, having signed up with Socios.com. Not just football, other sports such as cricket, motorsport, ice-hockey, basketball, tennis and fighting (MMA, etc.), are investing heavily in fan tokens. The reason for this being – it is a new and innovative monetisation measure, which is helping in curbing the loss of revenue incurred on account of the loss of gate receipts, sponsorship revenue, broadcasting returns and other promotional activities, as a result of which it is assisting in dealing with spike in expenses for the reasons of additional costs being incurred, such as player fee without any event, bio-bubble arrangements, frequent testing obligations, etc. The Covid-19 pandemic has had a huge financial impact on businesses across the world, with most stakeholders suffering, and the sporting world was not spared either. Since the events were either suspended or the turnstiles were closed, the unprecedented loss of matchday revenue has had huge financial implications to be borne sporting entities.

Like other cryptos, fan tokens, too, are volatile, as the prices can shoot up and dive according to the supply and demand in the market. Interestingly, it has been observed that sporting fanatics who buy these fan tokens have suggested that the prices of such fan tokens are relatively influenced by the movements, performance and activities of the concerned sporting entity. Since the fluctuating prices of these tokens depend on the supporters’ emotions and engagements, it is quite evident that some sports’ enthusiasts see fan tokens as a status symbol, a bond with the sporting entity they support and a loyalty indicator instead of as a long-term investment, thereby deeming to add another feather to the popularity and demand of fan tokens, resulting in notable monetary returns for the sporting entities.

As a general, but most important principle in investment, a sporting entity must always consider and analyse the risk-reward ratio, which is notably uncharted and foreign, for fan tokens is an area, still new and unexplored. Below are certain points highlighted for the sporting entities to consider before stepping foot onto this unmapped territory.

  1. Regulatory Measures

Fan tokens are marketed and sold globally, and it becomes pertinent to understand the regulatory and governing regime of each jurisdiction. The digital assets’ market is unregulated in some jurisdictions and regulated in others. In unregulated jurisdictions, the volatility of the market combined with the lack of legal protection appears alarming for both – the sporting entity and the fans. The extent of protection to the sporting entity in this case would largely be limited to contractual protections. But the wider range of questions relating to the legality and validity of the transaction and undertaking remain. It is unclear how this would impact the credibility, validity, future and existence of the fan token that the token holder already owns in an unregulated jurisdiction. Also, the aspect of advertising and the regulations around it (if any) must be carefully analysed before marketing and promoting the fan tokens.

Thus, prior to investing, a sporting entity must necessarily consider the regulatory and governing risks, i.e., compliances, licenses and permissions, if regulated, and the scalable diversion of the authorities in regard with regularising (or prohibition) of the digital assets’ market and the impact thereon, if currently unregulated.

  1. Financial Reliability of the Entity

It is quintessential that the token issuing entity has a sound financial background to ensure effectiveness, both from a business perspective as well as for the economic stability, of the fan token. Safeguards pertaining to the management of a fan token must be built around the possibility of a financial disbalance such as bankruptcy, administration or any other related financial claims and actions. This is because of the area being a novel endeavour and thus, every step towards facing a hurdle would be innovative and unexplored. Question such as would the sporting entity be able to secure all rights to the fan token; would the fan token be transferable to some other platform; would the fan token no longer be tradable; etc. cannot be answered at present as neither are there any specific regulations nor are there any live examples, judgments or precedents in this respect.

Notably, a recent incident on liquidation of a fan token issuing entity surfaced with the Monaco-headquartered entity – IQONIQ going into liquidation, leaving multiple sporting entities potentially out of pocket. IQONIQ entered into various commercial deals, pursuant to which, now they owe (Club) Real Sociedad €820,000, while (Club) Crystal Palace have already started looking for legal actions they could take against IQONIQ over the missed payments of their sleeve sponsorship deals. In such situation, especially when the market is unregulated at large, it becomes difficult for the sporting entities to execute appropriate actions, as well the fans being left stranded. Thus, a prior due diligence and safety measures are recommended. It is anticipated that post such a huge loss, greater scrutiny and regulation will be demanded from governing bodies to regulate the way sporting entities engage with cryptocurrencies and related assets. This could slow down the crypto’s investment in sport sponsorship and other commercial arrangements.

  1. Ownership & Intellectual Property Rights of Fan Tokens

An important matter for consideration in respect of collaborations between the sporting entity and fan token issuing entity is that these collaborations are usually in the nature of partnerships, and as such, the fan token undertaking and all its assets, liabilities, properties, etc. are jointly owned by both the sporting entity and the token issuing entity. Therefore, several questions relating to rights and ownership of the undertaking arise especially when the contract between the two entities expires. What would be the extent of liability and accountability of each entity under such circumstances or if any claims are bought against the undertaking. What would be the status and validity of the tokens issued? Ultimately, the future of the fan token and the fan token undertaking will, to a great extent, depend on the contract and the terms and conditions agreed upon between the sporting entity and the token issuing entity at the time of collaboration unless governments, or authorities such as regulatory bodies of sports, international forums, etc., make provisions in respect of the same. Hence, the same must comprehensively be considered prior to finalising the terms in this regard.

  1. Commercial Risks

The sporting entity will have a number of pre-existing contracts with different entities relating to its various rights and intellectual properties. These could be in respect of marketing, advertising, promotion, reporting, broadcasting, etc. or could be in respect of management, operation, partnership, collaborations and other commercial rights. Some of these might even be the grant exclusive rights to the other entity and the breach of the same could affect the brand and reputation of the sporting entity and even expose it to expensive lawsuits. For instance, the sporting entity might have outsourced the process of sale of tickets of its matches to a third party on an exclusive basis, however, as we observed, part of the rewards conferred on the token holder are free tickets to the sporting entities game, etc. This might result into a conflict. Therefore, it is paramount, that necessary and satisfactory due diligence is conducted to ensure avoidance of such breaches.

The crypto market is extremely volatile and issuing such assets will always be deemed a high-risk investment strategy. Nevertheless, one cannot ignore that these digital assets are slowly becoming a major part of the contemporary dynamics and has caught the eye of the regulators as well. Given the current scenario, the sporting entity must always realise that fan tokens provide the fans with an opportunity to interact more with their choice of the sporting entity, offering them a sense of exclusivity. Such belongingness not only helps in enhancing the goodwill of the sporting entity, but also helps impacts, in some way, the performance of the players and of course the revenue returns of such sporting entity.

As desirable as this commercial arrangement may sound, a sporting entity must always ensure balanced and efficient issuance, nature, performance and monetary rewards of fan tokens. There are a number of circumstances under which the sporting entity might be compelled to discontinue the issue and circulation of the fan token. This could be owing to the operation of law, policies, rules and regulations amongst others. However, it is also possible that the sporting entity chooses and decides to discontinue the circulation of the fan token for various reasons such as non-feasibility of the venture, termination of the agreement with the fan token issuing entity, financial losses, misuse, exploitation or overuse of the fan token, redundance of the objective or purposes for which the fan token was issued, so on and so forth, thereby attracting a number of risks and potential lawsuits. Henceforth, it is paramount that the sporting entity considers all possible contingencies and provides and discloses comprehensive terms and conditions on the issue, purchase, sale, transaction and discontinuance or termination of the fan token, ensuring that the losses are mitigated.

Rashi is an Associate at TMT Law Practice. She graduated in the year 2017 from Institute of Law, Nirma University, Ahmedabad, with specialization in Corporate Laws. Rashi completed her Masters in Business and Finance Law, from the University of Glasgow, in 2018.

Evolution of Esports – A Transactional View

Evolution of Esports – A Transactional View

Introduction

Owing to the dismal happenings around us caused by a pandemic, the year 2020had horror in store for every sector, across industries and jurisdictions. The world stood still and suddenly, there was no sporting event to attend, no new movie release in a theatre next door, no live performance/s and no schools, and the world was stuck inside their houses – for survival.

Remarkably, this spurred in building wider connection amongstpeople inthe gaming industry, and more so rapidly in electronic sports (“e-sports”).The world of e-sports has gone beyond just the players/ games or the viewers, and in the recent years, there has been a swift rise in the investment made in thissector.Any business relies upon schemes of mergers or amalgamation for sustainability and expansion of business operations; while earlier sports was a lucrative sector to pave their ways into, e-sports has come into vogue. 635 deals have been announced and/or closed during the first six months of 2021, with the wide majority of them being private placements (364), followed by merger and acquisitions with 169 [1]. This article shall explore the interplay of the e-sports fraternity with the investment opportunities, the issues, role and the impact thereof.

Esports and its Organisation

E-sports wascommonly understood as casual video gaming;however,it is now anintensely competitiveand complex sporting experience. With hours of training and practice, the e-sports players engage in a highly competitive tournament to win.The costs and investments made in this regard would be inclusive of the costs that would go into: (i) maintenance of the software, associated infrastructural costs; (ii) investing on the players’ training; (iii) promotional, public relations, ancillary costs; and the allied costs which may go into providing accommodation and travel expenditure to the players. An e-sports event organizer would have typically footed the expenses by way of entering intopartnerships, seeking sponsorships and funding from willing volunteers; however, with the evolution in the manner in which e-sports are now playing out, there is an investment opportunity now, i.e., by way ofmergers, acquisition and joint ventures (“amalgamation”).

As the e-sports industry is growing by leaps and bounds, the interest of people in owning a piece of the pie has also increased sporadically. Due to the pandemic, attention has been diverted towards e-sports in 2020 and the market has witnessed an increase in the investments in the esports industry. Celebrities and venture capitalists are investing millions of dollars, companies are merging together to consolidate, and acquisitions are considered as viable options too. For instance in a single month in 2020, FaZe Clan received $22.7 million loan facility; NTT Corp raised £2.1M to open esports venue in Japan; Juked raised $800,000 in pre-seed funding round; Faker obtained part-ownership of T1 Entertainment & Sports; Nicecactus acquired tournament platform Glory4Gamers; Tempo Storm raised $3.3M to enter interactive media and game design; Amukaesports acquired Canadian esports venue Waves E-Gaming; DBLTAP parent company Minute Media raised $40M; and Mobile Premier League acquiredGamingMonk to widen esports portfolio [2].

Reasons of Investment

Earlier, a gaming company would not have traded richly in terms of multiple investors ascribed to their expected revenues and profits. This was simply because, gaming is hit-and-risk-driven. However, in the contemporary world, this has changed as social connections are what the audiences are craving for and such gaming experience brought the people back together for interaction.Almost all companies, no matter their industry, have overlapping reasons for increasing their engagement with e-sports. Among the traditional reason of glaring returns on investments (profits), one is to connect with younger customers who are becoming increasingly difficult to reach through traditional channels, and other is the advantage of being first movers in this booming space.The gaming industry is currently moving towards the cloud and subscription platforms. With several high-rollers in the technology world launching cloud gaming platforms, e-sports has become a way to find a captive audience amongst the youngsters.

The impact of the pandemic has led to a lot of corporate restructuring with leading companies exploitingopportunities to reinforce their market positions by acquiring new capabilities or by acquiring distressed competitors. Among all sectors, amalgamations in gaming software sector saw the highest growth of 130% in 2020 compared to 2019 in terms of deal volume.Increase in participation by the public at large, leads to a relative increase in the investment opportunities, as the investors sense the growing prospect of prominent returns. As for an e-sports company, an amalgamation opportunity always complements the organic strategy of the business. But will this idea of expansion through amalgamation be enough and easy to incorporate? What are the nitty-gritties of any amalgamation arrangement, and is such arrangement in esports industry any different?

The ideal procedure of such an amalgamation starts from an investment strategy and the search for a target company. Followed by investment planning based on projections and the business strategy of the target company. Such evaluation is arrived at by at-length negotiations and due-diligence process, which then allows the investor to affirm its investment in the expected returns. Based on the analysis post such negotiations and success of the due-diligence process, the parties then enter into the concerned investment agreement with detailed financial understanding and terms for implementation. The most important step in any such arrangement is the process of due diligence.

Due Diligence

An investor, while exploring its options to invest in an e-sports company, will have to typically analyze the company’s user base, connected locations, gameplan and organic strategy of the business.As the domain is also fraught with regulatory ambiguities, it is for the investor to ensure that there is effective regulatory landscaping, and that there are no leaks, or disruptions which the target company is fraught with.

Legal Due Diligence

a) Typically, as the practice is presently, most of the companies which are offering e-sports are start-ups, and are invariably in between several rounds of fundraising. An investor is wary of the corporate structuring/ restructuring of the esports company to analyze the rights held by other investors (venture capitalists or institutional investors) viz. shareholding, veto rights, voting rights, pre-emption rights, rights to first refusal, dividends, redemption and profit sharing.

b) Furthermore, as an e-sports company is spread out and encompasses generation ofart design, graphics, music, storyline, technology, and would consequently generate a lot of proprietary rights, including intellectual property rights.As several companies also onboard e-sports/ programs from smaller studios and technology service providers, the investor also has to very carefully scope out the title, ownership and rights that the target company possesses over the assets in question.

c) The game offered by an e-sports company is created, offered and made available on certain platforms such as Xbox switch, Nintendo Switch twitch, YouTube, PlayStation, etc. To offer the games, such platform operators enter into necessary service and software licensing agreements with the e-sports company. Thereby, making it important for the investor to evaluate the control as well as the termination rights under such arrangements – specifically whether such arrangement can (or not) be terminated with a change in the structure and management of the e-sports company or whether the investor is comfortable with the way the ownership title and rights are distributed (if any). Furthermore, it has been observed that due to lack of governance and limited availability of the resources in the discipline of e-sports, such platform operators put onerous commitments and obligations on the e-sports companies.

d) Further, with respect to the sensitivity of the sector, it becomes important for the investor to ensure that the employees / consultants or any other staff which works with the target company is bound by the necessary terms of confidentiality, non-solicit and legally permissible non-compete clauses. As a matter of practice, in case where such individuals are involved in creation of proprietary solutions, it is upon the company (and later the investor) to confirm if the rights are sufficiently and validly recorded in the name of the company and does not allow for the staff to enjoy certain rights which would interfere with the exploitation rights of the company.

e) Certain general considerations would include confirmation on the representations and warranties, availabilityof necessary licenses and permissions, roles and obligations, indemnity and liability associated to each party. Certain warranties such as those related to the technology involved, infrastructural support, data privacy and protection, general compliance with applicable laws, player arrangements and representations are taken into consideration, while processing the investments into such e-sports company.

f) An e-sports company may enter into various promotional and marketing arrangements, the content and quality of which may be assessed by an investor. Such assessment is important as it reflects upon the goodwill and reputation of the target e-sports company and helps in calculating the valuation of the said target e-sports company.

Financial and Accounting Due Diligence: For any investor, the prominent factor is returns on the investment made. It is almost certain that the target e-sports company may have sought funding from several investors, thereby, creating difficulty in ensuring returns and, if returns are ascertained, creating hurdles in the manner in which such returns are due inter alia several investors with comparable or distinguishable rights.Much unlike any other new age technology sector, this particular sector also witnesses quick movement amongst the investors who continue to be invested in a company, pitted against the ones who look for exits for greener pastures.

Indian Laws

A scheme of merger and amalgamation in India is governed and authorized by the provisions of the Companies Act, 2013. Initially, according to Section 233 of the Companies Act, 2013 a scheme of arrangement may be entered between two or more small companies or between a holding company and its wholly owned subsidiary company but pursuant to amendment in Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 now the scheme of fast-track merger can be entered into by the following companies:

a) two or more small companies
b) holding company and its wholly owned subsidiary company
c) two or more start-up companies
d) one or more start-up company with one or more small company.

A “start-up company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number G.S.R. 127 (E), dated 19th February 2019 issued by the Department for Promotion of Industry and Internal Trade.

Further, by way of Companies (Amendment) Act, 2020, the fraternity has witnessed a change in the outlook of the regulators,as there has been a relaxation in the variation of the shareholders rights and reduction in the penalising provisions under the Companies Act, 2013.Such amendments in the Companies Act, 2013 has simplified the transactions to be conducted by an e-sports company. It has been observed that typically amalgamations are executed when there are two competitors coming together with the intention to reduce overhead, however in India the e-sports companies are ideally start-ups [that require funding to]and amalgamations assist such start-ups to generate substantial synergies and presence in the market. With the recent amendments, two start-ups with the intention to expand and grow are eligible to merge into one by applying for a scheme of fast-track merger [3]. Such start-ups are free to bifurcate the roles, obligations and payment structure, and with the fast-track motion, are able to execute their organic business strategies, economically.

Kaleidoscopic Growth and the Way Forward

This past decade haswitnessed huge transactions in the e-sports market. Electronic Arts (EA) is one of the most acknowledged gaming companies known for the epic rendition of sports games. EA had announced its intentions of acquiring Codemasters in 2020 [4] and the deal came throughin 2021, whereby EA acquired Codemasters for $1.2 billion on 18th February 2021 [5]. The Sports entertainment gaming company also added another feature to its acquisition list. EA acquired Glu Mobile for $2.1 billion [6]. Together with Microsoft, EA accounted for nearly 83 % of the first quarter’s acquisition record spending. Also, after the acquisition of Super Free games, Still-Front Group entered the Indian market and managed to successfully acquire Moonfrogs labs for $90 million.The fact that E-sports and gaming are now multi-billion-dollar international industries shows just how much untapped potential exists, specially for amalgamations of such service providers.

With the amendment Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, the legal environment has become more conducive for small companies and start-ups to amalgamate with domestic investors as well as foreign investors. E-sports as a source of entertainment currently has a worldwide audience of 500 million people and generates more than $1 billion in revenue annually which the numbers are forecast to multiplying over the next decade [7]. With such higher stakes in an industry that attracts several issues and technologies, it is no wonder that e-sports is a complex and important area and a hotbed of current and emerging legal questions and issues. Further, the scope for due diligence and negotiations will be ever expanding while the industry grows in the future. Thus, anyone participating in the said industry in any manner should be aware of, and ready to seek, qualified support. The cumulative abnormal returns for e-sports target and investing firms have provided the necessary fillip to the other investors to buy into this.Team ownership and sponsorship, media, merchandising, player representation, branding, event management, game and platform technology, game development and publishing are just a few areas generating opportunities through growth and consolidation. With new vehicles being developed every day, those interested in availing the returns of such opportunities in the e-sports world must keep themselves abreast about the risks and rewards, regulations and potential pitfalls to understand the manner of investment and mark their expectations accordingly.

Rashi Tater, Associate, TMT Law Practice

Rashi is an Associate at TMT Law Practice. She graduated in the year 2017 from Institute of Law, Nirma University, Ahmedabad, with specialization in Corporate Laws. Rashi completed her Masters in Business and Finance Law, from the University of Glasgow, in 2018. She was called to Bar in 2018 and is since stationed in New Delhi. She has expertise in the practice areas of sports, gaming, media, entertainment, and corporate laws, and has advised sports institutions & gaming operators, sportspersons impacted by doping matters, handling contractual and commercial arrangements, and building client relationships. In the initial years of practice, she also gathered experience in commercial litigation.

1:- https://www.gamesindustry.biz/articles/2021-07-05-game-deals-for-h1-2021-almost-double-total-2020-investments
2:- Esports investments, mergers, and acquisitions in February 2020 – Esports Insider
3:- Rule 25(1)(a) Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2021
4:- https://news.ea.com/press-releases/press-releases-details/2020/lectronic-Arts-Reaches-Agreement-for-Recommended-Acquisition-of-Codemasters-Group-Holdings-PLC/default.aspx
5:- https://www.businesswire.com/news/home/20210218005564/en/lectronic-Arts-and-Codemasters-Establish-a-New-Global-Powerhouse-for-Racing-Videogames-Entertainment
6:- https://www.koreagamedesk.com/gaming-acquisitions-in-the-first-quarter-of-2021/
7:- https://www.idtech.com/blog/esports-facts-about-game-changing-industry

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