Start-Up Registers First-Ever Athlete IPO with the SEC

Last month, Fantex Brokerage Services, a start-up company based in San Francisco, announced a new trading exchange for investors to buy and sell interests in the careers of professional athletes, allowing investors to take stakes in a professional athlete’s future earnings. Fantex recently registered the initial public offering (IPO) of Houston Texans running back Arian Foster, the first-ever athlete IPO, with the Securities and Exchange Commission. Fantex also plans to offer stock in the San Francisco 49ers star tight end, Vernon Davis, in the near future but has not yet registered the Davis IPO with the Securities and Exchange Commission. After the IPO of Mr. Foster and Mr. Davis, anyone over the age of 18 can purchase shares in Mr. Foster and Mr. Davis, in increments as low as $50, thus purchasing a portion of their future earnings, which includes the athlete’s salary, bonuses and earnings from sponsorships, endorsements, and appearances. If the Foster IPO or the Davis IPO fail to gain sufficient interest from investors, Fantex may cancel them.
 
Fantex was co-founded by Cornell “Buck” French, a West Point and Harvard Business School graduate, and David Beirne, a general partner at Benchmark Capital, a venture capital firm. Fantex has garnered support for its athlete IPOs from executives in Silicon Valley, Wall Street, and the sports industry. Mr. French stated that Fantex has ambitious plans to sign other professional athletes and eventually offer stock in actors, singers, and other entertainment stars.
 
Investors currently cannot submit orders for shares in the Foster or Davis IPOs but can register with Fantex on its website to purchase shares once they become available. Once shares are purchased, investors will only be able to trade the shares, currently called “Fantex Series Arian Foster Convertible Tracking Stock” or “Fantex Series Vernon Davis Convertible Tracking Stock”, as the case may be, on the Fantex exchange. Fantex’s theory is that shares in an athlete will increase in value if the athlete increases his earning potential either through superior athletic performance, new sponsorships and endorsements, or payments for appearances.
 
Although certainly an innovative concept, purchasing shares of an athlete from Fantex entails many risks for investors. Investors should be aware, for example, that an athlete’s earnings can be severely and unpredictably reduced by injuries and/or an athlete’s personal conduct off the field. In contrast to some sports leagues, an athlete’s earnings in the NFL are not guaranteed and players often do not earn the full amount specified in their contracts. Securitizing an athlete’s future earnings potential creates a web of complex securities regulations that must be followed and any talk of an athlete’s earnings potential creates a risk of insider trading violations. Also, unlike owning shares in a public company where shareholders have actual ownership of the company, investors in the shares of Mr. Foster and Mr. Davis do not own Mr. Foster and Mr. Davis; they own a share of their potential earnings and only through the virtual Fantex share exchange. Furthermore, unlike investing in shares of a public company, investors in shares of Mr. Foster or Mr. Davis have no governance rights (i.e., voting rights). Fantex has no plans to hold annual meetings or shareholder conference calls; investors have no control over an athlete’s brand or management of his career; and there is no guarantee of dividends and any dividends will be paid at the discretion of Fantex.

In fact, to underscore some of these risks, just three days after Fantex announced the Foster IPO, Mr. Foster played one of the worst games in his career in the NFL against the Kansas City Chiefs and left the game, unable to return, after the first quarter with a pulled hamstring. To compound matters, Mr. Foster will also undergo back surgery in the near future to repair a bulging disk in his back and will be out for the remainder of the 2013 season. In fact, due to Mr. Foster’s season-ending back surgery and injuries that have hampered his ability to play football at peak performance this season, Fantex decided to postpone the Foster IPO. However, Fantex’s CEO, Mr. French, has said that Fantex will work with Mr. Foster through his recovery to assess the appropriate time to offer Fantex Series Arian Foster Convertible Tracking Stock to the public.
 
From an investor’s perspective, investment in the Foster or Davis IPOs may be a risky proposition. However, from an athlete’s perspective, signing with Fantex may be a wise financial decision as athletes are paid a large upfront sum in exchange for a fixed percentage of their future earnings. For Mr. Foster and Mr. Davis, signing with Fantex may be a way to buy an insurance policy that hedges against a future decline in their earnings potential. Using Mr. Foster’s IPO as an example, if Fantex chooses to go forward with the Fantex IPO in the future, Fantex plans to offer $10.6 million worth of shares in Mr. Foster, or approximately 20 percent of Mr. Foster’s expected future earnings of roughly $50 million, at $10 a share. Fantex will pay Mr. Foster $10 million in exchange for offering shares of himself to the public through Fantex, which means if Mr. Foster earns less than $50 million from here on out, he will have benefited financially from offering shares in himself to the public.