Proposed Let Kids Play Act Would Impose New Restrictions on Private Equity Investment in Youth Sports

Recently, U.S. Senator Chris Murphy (D-Conn.) (along with U.S. Senator Cory Booker (D-N.J.)) and U.S. Representative Chris Deluzio (D-Pa.) introduced the Let Kids Play Act, a bill that would prohibit “vulture investors” from investing in youth sports. The bill’s broadly drafted definitions (such as “vulture investors”) capture a wide range of private fund structures and investment arrangements as well as a broad spectrum of youth sports businesses and youth sports facilities. It would establish a presumptive designation regime under which private equity funds with existing youth sports investments would be automatically classified as vulture investors unless they obtain certification from the Federal Trade Commission within a 91-day window (such certification requiring sweeping sworn statements subject to strict liability). Funds that fail to certify, or that are designated as vulture investors, could face mandatory divestiture of youth sports investments within two years, HSR Act reporting obligations regardless of transaction size, removal of sponsor-installed management and board members, and authority for the FTC and DOJ to impose escrow, disgorgement, refund, debt-forgiveness, and data-transfer remedies.

I. Prohibition on Vulture Investors and Vulture Practices in Youth Sports

Section 3 of the bill would establish two independent prohibitions. First, it would make it unlawful for any vulture investor to “invest” in a “youth sports entity.” Second, it would make it unlawful for any “covered firm” to engage in “vulture practices” in connection with investment in a youth sports entity.

A “vulture investor” would be any “covered firm” that “(A) engages, or has previously engaged, in vulture practices with respect to an entity that was an acquired entity at the time of such engagement; or (B) has had two or more acquired entities become financially insolvent or enter bankruptcy proceedings within five years of acquisition.” A “covered firm” would be defined as “(A) a private equity fund; or (B) a company that is owned or controlled by a private equity fund.” A “private equity fund,” in turn, would mean “a person who, (A) would be an investment company, as defined in the Investment Company Act of 1940, but for paragraphs (1) or (7) of section 3(c) of that Act (15 U.S.C. 80a–3); and (B) directly, or through an affiliate, exercises control of such company.” Section 3(c)(1) and Section 3(c)(7) are the exemptions often relied upon in private investment structures. Since the definitions rely on these exemptions rather than on any particular fund strategy or structure, the bill captures a full spectrum of pooled investment vehicles commonly used in private markets, including, for example, commingled funds, feeder funds, fund of ones, fund-of-funds, special purpose vehicles, parallel funds, and continuation vehicles. In addition, the definition of “covered firm” would not only include private equity funds, but also any company that is “owned or controlled” by such a fund. As such, portfolio companies, operating subsidiaries, holding companies, aggregators, and other downstream entities would themselves be deemed “covered firms” subject to the bill, making structuring any such investments, and diligence existing and potential investors, critical for all parties in the initial stages of considering any such investment and on an ongoing basis.

“Invest” would mean “to own, operate, control, manage, or otherwise direct the operation of the whole or any part of an entity or facility, including by entering into a management agreement or operational control agreement with an entity or facility.” An “operational control agreement” would mean “any formal or informal contract, agreement, or understanding, whether written or oral (including a limited partnership agreement, side letter, or any agreement between or among investors) through which a covered firm obtains the authority to influence or determine key operational decisions of a youth sports facility.” While the bill limits “key operational decisions” to decisions relating to (A) staffing and personnel, (B) scheduling and programming, (C) budgeting and financial management, (D) use and maintenance of athletic facilities, or (E) terms of participation or membership, the definition includes situations where such operational authority is contractually delegated to the private equity fund by others. Accordingly, even a minority stake, an advisory arrangement, or an informal side letter could be deemed an operational control agreement if it is determined any of the foregoing could influence or determine the key operational decisions. That said, the “invest” definition’s separate ownership prong, which reaches any party that “owns” the whole or any part of an entity, does not require a showing of operational control and is likely the more immediate concern for funds with equity positions in youth sports entities. Notably, these definitions do not include any ownership percentage threshold, thus capturing even de minimis or minority stakes.

“Youth sports” would mean “any organization, asset, service, or activity associated with organized athletic participation, instruction, or competition for individuals under the age of 18,” including leagues at all levels, all facilities and infrastructure, all associated technology and intellectual property (registration platforms, scheduling software, scoring systems, and performance metric technology), and all nonprofit and for-profit entities that provide or facilitate those activities. A “youth sports entity” would mean “any person, company, partnership, corporation, association, affiliate, or organization (whether for-profit or nonprofit) that provides, operates, manages, or facilitates youth sports.” A “youth sports facility” would mean “a field, court, stadium, sports complex, gymnasium, or similar athletic facility that is used for recreational, competitive sporting activities or to provide ancillary services for participants under the age of 18.” Any company or facility associated with or used by youth sports could be included.

A “vulture practice” would be defined as “any practice, term, condition, tactic, instrument, method, or act that causes harm or creates long-term risk of harm to an acquired entity in order to extract profit, assets, or other value for the benefit of a covered firm or its affiliates.” This includes imposing debt on an acquired entity to finance acquisition activity; employing roll-up strategies to consolidate control; converting an entity into a high-risk business by increasing prices, cutting jobs, imposing operational costs such as management fees, leases for seized assets, or capital distributions; and imposing one-sided terms that lock customers or workers into exclusive dealings with entities controlled by the covered firm.

II. Presumptive Designation: Covered Firms with Existing Youth Sports Investments

Section 4 of the bill would establish a presumptive designation framework that would apply immediately to any covered firm with existing youth sports investments. Such firms would be automatically designated as a vulture investor 91 days after the date of enactment unless certified. For prospective investments, a covered firm seeking to invest in a youth sports entity after enactment “shall be designated a vulture investor for all purposes under this Act and shall not initiate or proceed with any such investment unless and until certified.”

Certification would be the sole mechanism to rebut designation. A covered firm may rebut the presumption only by submitting a sworn certification, executed under penalty of perjury and subject to strict liability for any material misstatement or omission, by each general partner or equivalent individual with management authority, attesting that: (A) the firm and any affiliate, predecessor, successor, or entity under common control has never engaged in a vulture practice; (B) not more than one acquired entity has become financially insolvent or entered bankruptcy within five years of acquisition; and (C) the firm will not engage in any vulture practice at any time. Firms currently invested must submit certifications within 60 days of enactment; and firms seeking new investments must submit certifications at least 60 days before initiating the investment. Any certification not approved by the FTC within 31 days is deemed denied by operation of law. False certification carries a civil penalty of not less than $1,000,000 per certification, imposes jointly and severally on the firm and each executing individual without right of indemnification or insurance, as well as potential criminal liability of up to one year of imprisonment.

Designated vulture investors would face mandatory divestiture under Section 5. Not later than two years after designation, a vulture investor would need to divest or unwind all ownership stakes, agreements, and exclusivity arrangements related to any youth sports entity; return all assets, real estate, and intellectual property acquired from or generated by the entity; and remove any individuals installed by the vulture investor from management, executive, or board positions. Divestiture must be reported under the HSR Act regardless of transaction size, and the FTC and DOJ would retain authority to block any divestiture that would harm competition. If divestiture does not occur by the deadline, a trustee appointed by the FTC Chair and paid for by the vulture investor will oversee the forced sale. The FTC and DOJ may also impose additional remedies including disgorgement of revenue extracted through vulture practices, refund of junk fees, forgiveness of debts resulting from vulture practices, funding of scholarship programs at pre acquisition levels for five years, and transfer of all data and technology necessary to restore the entity’s operational independence.

III. Considerations for Investment Advisers

Investment advisers to any private equity funds and their portfolio companies affected by this bill will need to carefully consider how the bill’s mechanics interact with their fiduciary duties and otherwise impact their risk tolerance and compliance programs. Although an investment adviser may believe certification is in a fund’s best interest, without any additional guidance or enforcement actions, the broad definition of “vulture practice” makes any such certification inherently risky because ordinary-course arrangements, management fee structures, exclusive service agreements, debt-financed acquisitions, could arguably fall within its scope. Such risks associated with certification could drive premature and material divestitures of investments and negatively impact performance. The presumptive designation and compressed 91-day window described above may conflict with an adviser’s obligation to conduct adequate diligence, and compliance with the mandatory two-year divestiture period could conflict with the duty of loyalty to maximize value for fund investors where a forced sale yields below-market recoveries. Investment advisers will need to examine whether provisions in their fund documents should be modified or supplemented to address compliance with the Let Kids Play Act and whether to disclose the risks associated with any existing or future investments in youth sports to their investors (particularly since any company or facility associated with or used by youth sports could be captured by the Let Kids Play Act). Investment advisers to private equity funds may need to also consider requiring specific representations and warranties from their investors with respect to vulture practices and compliance with the bill (to the extent not covered by existing compliance with applicable law representations). Ultimately, the certification mechanism creates significant and complex legal and liability exposure that will require careful analysis to determine whether, and to what extent, existing or potential investments, practices, and/or agreements will be captured by the bill and subject to the requirements and restrictions therein.

IV. Key Takeaways 

• Because the definition of “private equity fund” captures any entity relying on the Section 3(c)(1) or 3(c)(7) exemptions, the bill reaches well beyond traditional, leveraged buyout funds to potentially include other private fund strategies, including growth equity, venture capital, hedge funds with control strategies, and co-investment vehicles. This also means that any pooled investment vehicle structured under such exemptions (including, for example, feeder funds, parallel funds, fund-of-funds, special purpose vehicles, and continuation vehicles) may be subject to the bill’s restrictions. Since a “covered firm” includes any company “owned or controlled” by a private equity fund, downstream entities (e.g., portfolio companies, operating subsidiaries, alternative investment vehicles, holding vehicles or aggregating vehicles) may also be treated as “covered firms” under the bill and subject to the restrictions described herein.
• Any fund that has ever engaged in any practice, term, condition, tactic, instrument, method, or act that causes harm or creates long-term risk of harm to an acquired entity in order to extract profit, assets, or other value for the benefit of a covered firm or its affiliates, or had two or more portfolio companies enter bankruptcy within five years, becomes permanently barred from investing in youth sports.
• “Youth sports” and “youth sports facility” are defined with equal breadth. The definitions encompass the full ecosystem of organized athletics for minors, including technology platforms, data and algorithms, facility operators, and tournament organizers. For private equity funds with investments in sports technology, facility management, or event operations, the definitions may capture portfolio companies that are not intuitively “youth sports” businesses, but touch some aspect of organized athletics for individuals under 18. As a result, private equity funds may need to consider requiring specific undertakings from their portfolio companies to ensure they do not inadvertently permit association with, or use by, youth sports.
• The certification framework creates a presumption-of-guilt regime. The combination of strict liability, personal criminal exposure for general partners, deemed-denied treatment after 31 days, and the FTC’s power to terminate certification at any time may make the cost of seeking certification outweigh the benefit of continued investment. Divestiture may be the path of least resistance regardless of whether a fund has actually engaged in harmful practices.
• The Let Kids Play Act would impose joint and several liability on any vulture investor, including control persons and affiliates, for all liabilities incurred by a youth sports entity during the period of control. It creates a private right of action with treble damages, reasonable attorneys’ fees, and jury trial rights, and invalidates pre-dispute arbitration agreements and joint-action waivers. The bill’s anti-evasion provision would deem any entity created or reorganized to avoid designation to be a covered firm, foreclosing structural workarounds such as blocker vehicles, side-car arrangements, or reorganizations designed to fall outside the statutory definitions. Taken together, these provisions would create significant regulatory, litigation, and operational risk for P.E. funds, their sponsors, portfolio companies, and co-investors with any current or contemplated exposure to the youth sports sector. Funds with existing youth sports investments would face an immediate decision between pursuing certification, which carries civil and criminal liability for false statements, or commencing a two-year divestiture process under FTC/DOJ oversight. Funds evaluating new investments would need to weigh the risk that any involvement in a youth sports entity could trigger designation, mandatory divestiture, and exposure to treble-damage litigation. Advisers should also consider the personal exposure of general partners who must execute certifications under penalty of perjury and strict liability.

We will continue to monitor these developments and provide updates as circumstances evolve. We can help with any questions you may have about the Let Kids Play Act or its potential impact on your business. Feel free to contact our team.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Tracie Ingrasin, an O’Melveny partner licensed to practice law in New York; Garrett Johnston, an O’Melveny partner licensed to practice law in New York and Texas; Chani Gatto-Bradshaw, an O’Melveny counsel licensed to practice law in New York; and Keith Turner III, an O’Melveny associate licensed to practice law in Texas, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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