The Green Bay Packers did not play in Super Bowl LVI on Sunday, but they have an “offering” that will remain active until February 25, 2022. This advisory explains what this “offering” is and what securities law lessons we can learn from this event.
Green Bay Packers
The Green Bay Packers are of course a member club of the National Football Conference (NFC) North division in the National Football League (the “NFL”). The Packers are based in Green Bay, Wisconsin and they are the third-oldest franchise in the NFL, dating back to 1919. One of the more recognizable faces of the franchise in recent years is quarterback Aaron Rodgers.
The Green Bay Packers are actually owned by Green Bay Packers, Inc., a publicly held nonprofit corporation that owns the Green Bay Packers football franchise.
Unlike all other NFL teams (and even all other U.S. major league professional sports teams), the Packers are community owned. Rather than being owned by an individual, partnership, or corporate entity, the Packers currently have 360,584 stockholders. No one stockholder is allowed to hold more than 200,000 shares, which represents approximately 4% of the 5,011,557 shares currently outstanding. The Packers were grandfathered into the NFL with this unique ownership system. For all other teams, a maximum of 32 owners, with at least one owner holding a minimum of 30%, remains the league standard.
Green Bay prides itself on its broad-based community support and non-profit structure which has kept the team in Green Bay for nearly a century in spite of being one of the smallest markets in all of North American professional sports.
So, the Packers, unlike other NFL teams, are actually “owned” by the public, and this gives the Packers the ability to offer shares of “stock” to the public from time to time.
The Packers initially sold 1,000 shares of stock at $5 per share along with a promise that each stockholder would buy at least six season tickets. Additional stock offerings took place in 1935, 1950, 1997, and 2011.
For the sixth time in 100 years, the Packers are currently engaging in another “stock offering.” This much publicized offering is going on until February 25, 2022. The offering price is $300 per share of common stock and the Packers intend to offer up to 300,000 shares.
However, these are not exactly “shares of stock.” As advertised, and as the Packers inform potential “investors” immediately, the common stock they are offering does not constitute an investment in “stock” in the common sense of the term. The Packers warn that purchasers should not purchase shares of common stock with the purpose of making a profit.
Claims of a Scam
While this offering is continuing, there have been many pundits who decried that this is a fraud, a complete scam and that people are not really getting any shares of stock.
The claim is that the Packers are a massively profitable franchise, they do not need the funds, and they dupe innocent fans into spending money for a piece of “worthless paper”. Others feel there is a sentimental value to this piece of paper, which is the certificate evidencing the ownership of “shares”.
While it is true that the Packers are being upfront about the shares, is that enough?
The Legal Background
Is it a security? Is it stock?
Stock is a type of security. The two main federal laws that deal with securities are the Securities Act of 1933,(the “Securities Act”) and the Securities Exchange Act of 1934.
The two laws provide that unless the context otherwise requires, “security” means “any note, stock, treasury stock, security future, bond, debenture, investment contract, … or, in general, any interest or instrument commonly known as a ‘security’.”
To better understand what a security is, people usually start with the Howey Test. The Howey Test refers to SEC v. W.J. Howey Co., a Supreme Court case dating back to 1946. Howey sold tracts of citrus groves to purchasers who would then lease back the land to Howey. Howey employees would tend to the groves and sell the fruit on behalf of the purchasers who had no knowledge of how to tend to citrus groves.
The Howey definition of an “investment contract” was:
- There has to be an investment of money,
- In a common enterprise, and
- Profits must come “(solely) from the efforts of others.”
In the case of Howey, the contract was deemed a security because the purchasers received the profit through the efforts of others. In 1975, the Supreme Court decided United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975). Forman dealt with a New York City co-op. To obtain an apartment, one had to purchase “stock”, but the stock itself had none of the features of traditional stock and mainly was used as a security payment for the purchase of an apartment in the co-op. The residents sued, claiming they had been sold stock, and the Supreme Court held that it was not stock, and was not even a security according to the Howey test. The reasoning was that there was no expectation of profit as in the Howey sense.
So what really matters is whether an investor is able to exercise meaningful control over his investment, and also whether there is an expectation of profit, especially profits generated specifically from the success of the enterprise.
Packers “Offering” Terms
Looking at the offering terms, it is easy to immediately conclude that what is being sold is not stock.
Although the Packers are selling what they call “common stock” and although such “common stock” carries an equal right to vote with all other shares of common stock, the Packers indicate in their offering document that prospective purchasers should be aware that the common stock represents a completely non-economic investment.
They even go on to say that the best characterization of a purchase of their common stock is that it represents a contribution to the capital of the Packers that will: (i) be segregated from the general operating funds of the Packers corporation and used solely for stadium and other capital improvements, but the existence of the segregated fundwill in no way be for the benefit of a purchaser of the common stock;(ii) entitle the purchaser of common stock to receive a common stock certificate evidencing the purchase and to vote at the Packers corporation’s annual meetings; and (iii) not entitle the purchaser to a tax deduction or any other economic benefits.
They add that the common stock does not constitute an investment in “stock” in the common sense of the term because (i) the Packers corporation cannot pay dividends or distribute proceeds from liquidation to its shareholders; (ii) the common stock is not negotiable or transferable, except to family members by gift, or in the event of death, or to the Packers corporation at a price substantially less than the issuance price; and (iii) the common stock cannot be pledged or hypothecated.
To summarize, the common stock being offered by Packers cannot appreciate in value and holders of common stock cannot recoup the amount initially paid for the common stock, either through resale or transfer, or through liquidation or dissolution of the corporation.
Not Necessarily a Scam
The “common stock” offered to the public is therefore indeed “worthless”. It cannot appreciate in value and is therefore not legal stock. It is pretend stock. Instead of getting a bobblehead from the team, the investor gets a certificate they can hang on the wall, but the certificate has no economic value.
Shareholders however receive voting rights, an invitation to the corporation’s annual meeting, and an opportunity to purchase exclusive shareholder-only merchandise. That is not completely worthless. It just isn’t stock.
The Packers are well aware that this stock is not really stock. Therefore, they even say explicitly that because they believe the stock offered is not considered “stock” for securities laws purposes, they believe offerees and purchasers of the common stock will not receive the protection of federal, state or international securities laws with respect to the offering or sale of common stock. In particular, the common stock will not be registered under the Securities Act or any state or international securities laws. The common stock will not be approved by the Securities and Exchange Commission (the “SEC”) or any state or international regulatory authority, nor will the SEC or any state or international regulatory authority approve the offering or the terms of the offering.
Since the Packers are being upfront that this is not stock and that stockholders will receive no protection from the SEC or any other agency, it is hard to claim that this is a scam. Sure, they are calling it stock, but they immediately explain in detail and repetitively that this is not stock. So potential purchasers are not being scammed. Unless of course they do not read the offering document, sometimes called an offering memorandum, an information circular, or a prospectus.
It is important therefore to read the offering documents, and the terms and risks outlined in them, whenever purchasing securities, even with real stock, and even with public companies. Because for example:
- You might think you are buying stock in a company and it turns out you only bought stock in a holding company, or that only part of your stock is invested in the specific company you wanted to invest in.
- You might think you are buying a direct interest in real estate and you are only buying the stock of a real estate company investing in real estate.
- You might believe you are buying stock that is equal to other outstanding shares and it turns out there are multiple classes of stock, and other classes of stock have superior rights that your stock does.
- You might not be aware that the company you are investing is almost completely controlled by a single shareholder and your ability to influence the direction of the company is minimal.
- You might think you are buying stock in a company that is engaged in a specific business, but only if you read the prospectus will you learn that it is a company that is engaged in a completely unrelated business.
- You might think your stock will pay you dividends, but it actually never will, and that risk will be spelled out in the prospectus.
- You might believe your investment is in a company regulated by certain laws, but it is actually incorporated or operated in a state or a country that does not have regulatory protections.
- You might believe your stock will be easily transferable or trade-able and you find out there are transfer restrictions or that there is no liquidity.
- You might not be aware that your equity holding will go through multiple events of dilution since the company is planning to make additional equity financings.
There is no specific law that prohibits the Packers from calling their certificates “stock” as long as they are clear that what is being sold is not, in fact, stock. A rose by any other name is still a rose, but naming something a “rose” does not make it a rose. Whether the Packers were clear enough in warning purchasers, that what is being purchased is not stock, and whether they were careful not to mislead potential purchasers in any publication, in any disclosure or interview regarding the offering, is a question of fact. What is clear is that investors must always carefully read the offering documents of any securities (or purported securities) that they plan to purchase.
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Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2022 Carter Ledyard & Milburn LLP.