Part Three – The Birth of the Open System
- Create the necessary new legal entities
- A functioning open pyramid requires a clean, purpose-built set of legal entities. These replace the fragmented, closed-model vehicles that are being dissolved and create clear lines of authority, revenue flow, liability protection, and continuity through promotion and relegation.
- Unified Professional Pyramid Governing Entity
- Establish a single national governing entity with responsibility for the overall professional pyramid. This entity would:
- Set and enforce competition rules, calendar, and sporting regulations across all tiers.
- Oversee club licensing and financial monitoring standards.
- Hold or license key collective commercial rights
- Manage relationships with U.S. Soccer, player associations, and external regulators.
- Serve as the membership body that clubs join by sporting merit rather than by purchase of a franchise.
- Antitrust considerations remain relevant.
- Establish a single national governing entity with responsibility for the overall professional pyramid. This entity would:
- Tier-Level Competition Companies
- Where operational, commercial, or liability separation is useful, create distinct tier-level operating companies (e.g., Division 1 Competition LLC, Division 2 Competition LLC). These entities can:
- Administer day-to-day league operations for their tier.
- Hold tier-specific commercial contracts or sponsorship packages.
- Isolate financial and legal risk so that distress in one tier does not automatically contaminate others.
- LLCs under a common parent are common tools for this kind of internal segregation.
- Where operational, commercial, or liability separation is useful, create distinct tier-level operating companies (e.g., Division 1 Competition LLC, Division 2 Competition LLC). These entities can:
- Central Revenue-Distribution and Parachute/Solidarity Trust
- Create a dedicated trust or special-purpose vehicle to receive and distribute central revenues, parachute payments, and solidarity payments. Key design features:
- Independent trustees or independent directors.
- Strict purpose limitations and distribution waterfalls written into the governing documents.
- Non-petition covenants and separateness undertakings to support ring-fencing.
- Clear rules for calculation, timing, and conditions of parachute and solidarity distributions.
- This structure draws on established practices in stadium financing and commercial rights vehicles
- The goal is to ensure that designated funds reach the intended clubs and purposes even if the governing entity or individual clubs face financial pressure.
- Create a dedicated trust or special-purpose vehicle to receive and distribute central revenues, parachute payments, and solidarity payments. Key design features:
- State-Level Youth Competition Entities (or Formally Empowered State Associations)
- For the youth layer, two complementary approaches are available:
- Formally empower the existing 54 state associations with clear statutory or contractual authority to run the state promotion/relegation pyramids, licensing, and competition.
- Where greater commercial or liability separation is desired, create dedicated state competition companies that operate under the association’s oversight.
- Either route must address Attorney General oversight of charitable assets in states that regulate nonprofit dissolutions and asset distributions, and must preserve continuity of player registration and competition rights.
- Independent Regulatory Bodies
- If enabling legislation is enacted (modeled in concept on the UK’s Independent Football Regulator), create one or more independent regulatory entities with defined statutory powers over financial sustainability, ownership fitness, and competition integrity.
- These bodies should be structurally independent of the governing entity and the clubs, with secure funding and clear enforcement tools.
- Individual Club Ownership Vehicles Designed for Promotion and Relegation
- Each club should operate through an ownership vehicle whose governing documents and financing arrangements are drafted to survive movement between tiers. Critical requirements:
- Change-of-control and material-adverse-change clauses in loan agreements, stadium leases, and sponsorship contracts must be carefully negotiated so that promotion or relegation itself does not constitute a default or trigger acceleration.
- Ownership and voting structures should remain stable across tiers; only the club’s competition membership status changes.
- Separateness between the club operating entity, any stadium/facility entity, and any academy entity is advisable to limit contagion.
- Each club should operate through an ownership vehicle whose governing documents and financing arrangements are drafted to survive movement between tiers. Critical requirements:
- Separate Trusts or Special-Purpose Vehicles for Ring-Fenced Funding
- In addition to the central revenue trust, establish dedicated vehicles for:
- Parachute payment receipts and multi-year distributions.
- Solidarity payments to lower-tier clubs.
- Youth development and academy funding streams.
- These vehicles should incorporate classic ring-fencing techniques: independent governance, restricted purposes, controlled accounts, true-sale or absolute-assignment language where appropriate, and limitations on the ability of the vehicle to petition for bankruptcy or merge with operating entities.
- The objective is to prevent operating shortfalls at club or league level from diverting money intended for structural support of the pyramid or the youth pathway.
- In addition to the central revenue trust, establish dedicated vehicles for:
- Implementation Notes and Legal Compliance
- Document all inter-entity agreements (services, licensing, revenue assignment, cost allocation) at arm’s length and with clear audit rights.
- Build in independent director or trustee requirements for any vehicle holding ring-fenced funds.
- Review all existing financing, stadium, and commercial contracts for change-of-control, assignment, and consent provisions before migrating clubs into the new structure.
- Maintain contemporaneous records supporting the business purpose of each new entity to withstand later scrutiny in insolvency, tax, or fiduciary-duty disputes.
- This architecture creates a durable legal foundation: a unified professional pyramid that can expand and contract through sporting merit, state youth structures with clear authority, and protected funding streams that cannot be easily diverted when individual clubs or tiers encounter financial stress.