On October 17, 2013, Fantex Holdings launched an “all-new marketplace that allows investors to buy and sell Fantex, Inc. stock linked to the value and performance of the brand of a professional athlete.”1 The Initial Public Offering will be called a “Fantex Series Arian Foster Convertible Tracking Stock.”2 The offering has been subject some confusion. Dealbook covered the release with the title “Want a piece of a star athlete, now you can buy one.”3 On the other hand, Fantex describes its offering as giving investors the ability to “[o]wn stock linked to the value and performance of an athletes brand.”4 Although Fantex is not the first to offer exotic securities, this new business model presents significant observable and unobservable risks to the public that are not adequately protected by current securities law.
The most obvious risk is that Foster could get severely injured. Since NFL contracts are not guaranteed, if Foster were to be cut from the team, his earning potential would be drastically reduced. An average sports fan would also be able to figure out that at twenty-seven, Foster will not likely see another major NFL contract.
However, there are plenty of risks that are not as obvious to the Arian Foster IPO. While the name may suggest that an Arian Foster IPO would be an investment in Arian Foster, it is necessary to distinguishing the Arian Foster IPO as owning a stock linked to Arian Fosters brand. When an investor buys a share of the Arian Foster IPO, they are actually buying a share of Fantex stock.5 Fantex is offering these securities in order to finance the acquisition of a “brand contract” with Arian Foster.6 The contract entitles Fantex twenty-percent of Arian Foster’s brand income7, however Fantex is not under any obligation to pass along these earnings to its investor.8
If Fantex does not pass along its earnings to its series Arian Foster shareholder, the best way to profit from the investment is stock appreciation. The value of the stock is linked to the “economic performance of the athlete” including endorsement deals, contractual income and appearance fees. While this method of valuation may work, as the company notes, “there is no assurance as to the development or liquidity of any trading market.”9 Since the securities Fantex issues will only trade on the Fantex exchange10, it may not enjoy the liquidity benefits exchanges such as the New York Stock Exhange (NYSE). Additionally, there is no grantee that the company itself will be successful – this is vitally important because the investor is ultimately buying a share of Fantex Stock. Finally, since the Foster IPO only represents a 1% ownership interest in Fantex, shareholder will be unable to have themselves be adequately represented.
Sophisticated investors are quite aware of the number of risks presented when investing in Fantex.11 When compared to the options available in a NYSE platform, it is likely that many sophisticated investors will not participate in the Fantex IPO. However, based on the layout of the website and the gimmickry language used (e.g. “This trading platform is made of turf and hardwood”), the average investor and not the sophisticated investor is the target demographic. While the average investor can take into account visible risks associated with making an investment into sports professional, they are unlikely to understand the issues outlined above. Given the popularity of fantasy sports and the gambling associated it does not seem likely that Fantex will not have a difficult time raising ten million dollars at ten dollars a share. However, it will likely be at the expense of uneducated shareholders.
Fantex Inc., Prospectus (Form S-1) (Oct. 17, 2013). ↩
Steve Eder, If You Like a Star Athlete, Now You Can Buy a Share, N.Y. TIMES, (Oct. 17, 2013), http://dealbook.nytimes.com/2013/10/17 /want-a-piece-of-a-star-athlete-now-you-really-can-buy-one/. ↩
Supra Fantex.com. ↩
Fantex Inc., Prospectus (Form S-1), at 5 (Oct. 17, 2013). ↩
Id. at 1. ↩
Id. at 3. ↩
Id. at 13. ↩
Supra Fantex.com. ↩
supra Fantex Prospectus at 26. ↩
See generally Life’s too Short: Fantex Edition, Abnormal Returns (Oct. 27, 2013, 1:30 PM), http://abnormalreturns.com/lifes-too-short-fantex-edition/. ↩