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Pay to Play – Definition

Pay to Play – Definition

Pay to play simply means requiring money to be a part of some activity. In the corporate world, individuals wishing to be part of a transaction must often put in money. This is common in investing, where an individual must put in funds to be part of a future equity round.

A Little More on What is Pay to Play

In corporate or startup finance, Pay to Play is commonly added as a provision of preferred stock. It demands stockholders to take part in stock offerings to get benefit from specific anti-dilution protections. If they do not buy prorated stock in these offerings, they lose the provisional benefits. In extreme situations, investors not taking part in it have to convert to ordinary stock, so they lose the protections of the preferred stock.

This idea reduces the big investors’ fear that small investors will let them continue providing the required equity and get benefits, especially in problematic economic situations for the corporation. This is known as harsh provision added only when one participant is having a strong bargaining power.

Negative Connotation

Pay to Play often refers to gifts and monetary exchanges to influence decision makers. For example, the exchange of gifts or money and provision of sponsorship in a way that construction, engineering or design company is selected for work that otherwise might not be available. This type of conduct is illegal in many industries, such as in the financial markets.

In the United States, the SEC (Securities & Exchange Commission) of the United States, the MSRB (Municipal Securities Rulemaking Board) and the FINRA (Financial Industry Regulatory Authority) regulate and restrict the gift awarding practices of investors. More details is available in the IAA Rule 206(4 to 5) (Investment Advisers Act 1940 and G-37, G-38 rules in the Rule Book of MSRB.

References for Pay to Play

Academic Research on Pay to Play

•    Pay to play in parks: An Australian policy perspective on visitor fees in public protected areas, Buckley, R. (2003). Journal of Sustainable Tourism, 11(1), 56-73. In most of the public protected areas of the world, there is a fee for commercial tours, entrance and overnight camping. This fee increases revenue and also may have an impact on the behaviour of the visitor. This fee is charged because government funds are not adequate to afford all these expenses. Fee impacts and acceptance depends on the economic, political, social, legal and historical context. Equity between several social groups and use of alike raised funds are 2 important problems.

•    Paytoplay politics: Informational lobbying and contribution limits when money buys access, Cotton, C. (2012). Journal of Public Economics, 96(3-4), 369-386. The authors design a game theoretical framework of data lobbying in a politician and 2 interest groups. The former may need contributions in place of access. 3 claims can be there: 1) wealthy people can approach politicians better than the poor ones. 2) this benefit of access makes them better off 3) contribution restrictions can minimize the benefit of the rich group. It is up to the politician to charge a fee for access. If this access is just for rich people, its expected advantage is completely offset by the payment made to the politician. This research offers a new advantage of contribution limits. They can encourage lobby groups.

  • •    Will developers pay to play?, Porter, D. R. (1988). Journal of the American Planning Association, 54(1), 72-75. In this paper, the author investigates on the Pay to Play policy and provides details about it, do the developers pay to play or not, similarly, if they play, is this a fair play?
  • •    Is PaytoPlay Driving Public Pension Fund Activism in Securities Class Actions-An Empirical Study, Webber, D. H. (2010). BUL Rev., 90, 2031. Nowadays, there is speculation in public pension funds using the Pay to Play policy. The political board members drive these funds to get plaintiff appointments. This study analyses the securities litigation of one hundred and eleven funds from 2003 to 2006. This research finds no evidence for the concept that beneficiary board officers are driven by the union to get plaintiff appointments. Politicians’ resistance for leading plaintiff appointments correlates with business effect in the home states of the politicians.
  • •    The price of pay to play in securities class actions, Choi, S. J., JohnsonSkinner, D. T., & Pritchard, A. C. (2011). Journal of Empirical Legal Studies, 8(4), 650-681. This paper describes the impacts of campaign contributions for leading plaintiff Pay to Play on the attorney fee level in securities class activities. The state pension funds usually pay a lesser attorney fee for this purpose. Pay to Play raises agency costs that the shareholders bear in securities class activities, undermining the main goal of Congress in following the PSLR Act (Private Securities Litigation Reform).
  • •    Paytoplay: fair or foul?, Hoff, D. L., & Mitchell, S. N. (2006). Phi Delta Kappan, 88(3), 230-234. This paper provides information on Pay to Play and explains this phrase with the help of examples. The authors evaluate this policy in various sectors of the economy and analyse whether the Pay to Play is a fair practice or it is harming some industries of the economy because of favouritism, bribery, corruption and unfair bias.
  • •    Safeguarding Markets from Pernicious Pay to Play: A Model Explaining Why the SEC Regulates Money in Politics, Torres-Spelliscy, C. (2012). Conn. Pub. Int. LJ, 12, 361. The regulations of the Securities & Exchange Commission seem to go beyond the jurisdiction but in actual, there is nothing like that. 3 times in history, the SEC involved in this practice, in 1994, in the bond market of the municipality, in 2010, in the public pension money market and 1974-1977, inquiring about post-watergate payments. The 1st 2 interventions caused the formulation of new commission principles while the 3rd concluded in a federal statute, named “Foreign Corrupt Practices Act”. Then, the Money in Politics Model was presented. The authors evaluate the effectiveness of this model and the SEC should follow it or not.

 

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