The start-up company Fantex Holdings and its newly created trading exchange for investors to buy and sell interests in professional athletes have recently shed light upon the intersection of venture capital and professional athletics ((Peter Lattman & Steve Edler, If You Like a Star Athlete, Now You can Buy a Share, Dealbook (Nov. 29, 2013), http://dealbook.nytimes.com/2013/10/17/want-a-piece-of-a-star-athlete-now-you-really-can-buy-one/?_r=0.)) Fantex Holdings has created stocks tied directly to an athlete’s financial performance; a progressive venture that is backed by executives from Silicon Valley, Wall Street and the sports world. The first candidate for the company’s inaugural I.P.O. is Houston Texans’ running back Arian Foster. ((Id.)) The company marketed the I.P.O. in October of 2013, offering 1.06 million shares at $10 a share. Investors can now place orders for the I.P.O., in return receiving stock linked to Foster’s future earnings, which includes the value of his playing contracts, corporate endorsements and appearance fees. In addition to the promise of a potential return on the future earnings of Foster, investors are also receiving the obvious risks that accompany the progressive investment. ((Id.)) In a filing for the Foster deal with securities regulators, Fantex laid out 37 pages of risk factors, including a possible career-ending injury or a performance slump. ((Fantex Holdings, SEC (Nov. 29, 2013), http://www.sec.gov/Archives/edgar/data/1573683/000104746913009713/a2216998zs-1.htm.))
As for Foster, he will receive a $10 million payment from Fantex upon consummation of the offering. In exchange for the payment, Mr. Foster has promised to pay Fantex 20 percent of his future earnings. ((Lattman & Edler, If You Like a Star Athlete.)) The popularity of the investment option among both athletes and potential investors is also a point of contention at this early stage in the game. ((Susana Kim, Buying NFL Player Arian Foster’s ‘Stock’ More Gamble Than Investment, Financial Advisors Say, abc News (Nov. 28, 2013), http://abcnews.go.com/Business/buying-nfl-player-arian-fosters-stock-gamble-investment/story?id=20600202.)) Athletes and their agents could view Fantex as a compelling proposition, providing athletes with a large upfront payment for giving up a certain percentage of their future earnings. Such a payment could potentially act as a hedge against an unexpected downturn in a player’s career. ((Id.)) Alternatively, financial advisers could counsel players against trading a piece of their future earnings for a big lump sum, as some athletes are notorious for spending in excess. ((Lattman & Edler, If You Like a Star Athlete.))
Additional considerations surrounding the investment opportunity include the risk of insider trading violations, and complying with the federal securities laws. ((Id.)) The possibility of making a bad investment is particularly apparent when evaluating the risk of investment in N.F.L. players, because unlike some other sports, N.F.L. contracts often are not fully guaranteed. ((Id.)) So, for investors, the long-term outlook for a player will be difficult to gauge. If a player’s career takes a downturn and the tracking stock declines, there will be no rescue financing to stabilize the share price. And unlike a stockholder of a public company, investors have no corporate governance rights. ((Id.))
Foster is only the first on a long list of potential professional athletes on the radar of Fantex Holdings at this early stage in the game (the second NFL player, Vernon Davis of the 49ers also recently signed). ((Peter Lattman, A Second N.F.L. Player Signs Public Offering Deal, Dealbook (Nov. 29, 2013), http://dealbook.nytimes.com/2013/10/31/fantex-adds-another-athlete-to-its-i-p-o-roster/.)) The company has also voiced interest in creating investment opportunities in other popular figures in the entertainment industry, including singers, actors, etc. ((Id.)) The development of this new type of investment and the way in which it will interact with professional athletics in a broader sense, however, remains an unanswered question. There is an argument to be made that private equity firms are changing the way that professional sports teams are purchased and operated; specifically, private equity investors are buying sports teams and using the same principals that turn around troubled companies. This notion and its potential success will ultimately help answer the question on everyone’s mind in the early stages of this game: whether or not sports teams are becoming something viewed as a bonafide investment in the private equity world.
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