The ABA was formed to compete with the well-established NBA. The new league allowed potential owners to obtain a professional team much more affordably than the NBA was offering for an expansion team.
The American Basketball Association (ABA) was founded in 1967 by Dennis Murphy, former mayor of Buena Park, California, and Gary Davidson, an attorney from Orange County, California. George Mikan, a former National Basketball Association star best known for his career with the Minneapolis Lakers, was named as the league's first commissioner, saying that the ABA would avoid raiding the players from the NBA as the upstart league as it wanted to avoid legal issues relating to the reserve clause and hoped to avoid creating a bidding war for talent that would make player salaries unaffordable. Despite that, The New York Times reported that tentative offers had been made to Oscar Robertson and Wilt Chamberlain, who was offered a contract that would pay him $50,000 (half of what he was making with the Philadelphia 76ers) along with a 20% share of the team that started play as the New Jersey Americans.
By April 1967, the league announced that they would begin play for the 1967–68 season with 11 teams in two divisions. The Eastern Division would include teams representing Indianapolis, Indiana, Louisville, Kentucky, New York City, Minneapolis and Pittsburgh, while the Western division would be made up of Anaheim, California, Dallas, Denver, Houston, New Orleans and Oakland. Each team owner made a commitment that they would have the resources to run for at least three years on annual budgets of $500,000 and would be able to absorb any financial losses during that period.
With the first pick in the league's inaugural draft in April 1967, Indianapolis chose Jimmy Walker, who had been a collegiate All-American at Providence College, where his 30.4 points per game led all major college players. Walker was also the first pick in the 1967 NBA draft by the Detroit Pistons and ended up playing his entire career in the NBA. Among its picks, New Orleans selected pole vaulter Bob Seagren "because he is a great athlete and we think he can play pro basketball", despite the fact that he had never played basketball at the college level. The 11 teams selected a total of 130 players.
In June 1967, NBA leading scorer Rick Barry left the San Francisco Warriors to sign with Oakland, making him the seventh player and the first superstar to defect to the upstart league. The landmark three-year contract offer from singer and team owner Pat Boone was estimated to be worth $500,000 and would make him one of basketball's highest-paid players. The agreement included 15 percent ownership in the franchise, with led Barry to remark, "The offer Oakland made me was one I simply couldn't turn down." In August, however, a superior court judge upheld the reserve clause in Barry's contract and ruled that he was obligated to play for the Warriors or sit out for the entire season. Barry ultimately chose to sit out for the year, rather than play for San Francisco.
Mikan unveiled the league's distinctive red, white and blue official ball in August, calling it "a patriotic ball" and saying that it would be more appealing visually on television.