Opinion

Felix Salmon

Bad investment of the day, Fantex edition

By Felix Salmon
October 18, 2013

Now that the ban on general solicitation is over, all manner of weird companies are emerging from the nether regions of the internet, trying to persuade people to part with their money in return for a nominal stake in some unlikely investment. One of the glossiest of these new companies is Fantex, which just filed a prospectus for its first athlete-IPO.

Fantex couldn’t have hoped for better press: the NYT covered the story in its Venture Capital section, under the headline “If You Like a Star Athlete, Now You Can Buy a Share”. ESPN, meanwhile, went with “Fantex to offer Arian Foster stock”, while USA Today opted for “Want to invest in NFL’s Arian Foster? Here’s a chance”. Which just says to me that none of the journalists actually read and understood Fantex’s S-1.

The idea here is not a new one; indeed, Michael Lewis wrote about it in depth as long ago as April 2007.

When financial historians look back and ask why it took Wall Street so long to create the first public stock market that trades in professional athletes, they will see ours as an age of creative ferment. They’ll see a new, extremely well-financed company in Silicon Valley that, for the moment, sells itself as a fantasy sports site but aims to become, as its co-founder Mike Kerns puts it, “the first real stock market in athletes.” And they’ll find, in the bowels of the U.S. Patent and Trademark Office, an application from a cryptic entity called A.S.A. Sports Exchange containing a description of a design for just such a market: The athlete would sell 20 percent of all future on-field or on-court earnings to a trust, which would, in turn, sell securities to the public.

Kerns’ cryptic entity ended up being called Protrade, and going exactly nowhere. But Fantex is basically exactly the same thing, just a little bit more complicated and less attractive to investors. With Protrade, you’d buy shares in a trust, which would own 20% of any athlete’s earnings. With Fantex, by contrast, you buy shares in Fantex — a highly risky startup company which is losing money and which has precious little income with which to cover its substantial expenses.

The vast majority of the shares in Fantex — 100 million, to be precise — are closely held by its founders and backers. But another 1 million are being sold to chumps at $10 apiece, to raise the $10 million that Fantex is going to pay Arian Foster, who currently plays football for the Houston Texans. The chumps are buying something called a “tracking stock”, the performance of which is supposed to mirror the economic fortunes of the 27-year-old athlete. And maybe it will. Or, maybe it won’t. The directors of Fantex are under no obligation to pass Foster’s earnings on to shareholders in the form of dividends — even assuming that the contract with Foster does indeed do what it’s meant to do, and result in Fantex receiving 20% of Foster’s earnings, more or less in perpetuity.

The press surrounding Fantex makes it seem as though the biggest risk here is that Foster ends up with a dud of a career — and that is indeed one of the many risks with this investment. But that’s also exactly what Fantex wants you to think: that your stock will go down if Foster does badly, and will go up if he does well.

In reality, however, there are even more non-Foster risks to this stock than there are Foster risks. Your stock, for instance, can only be traded on an exchange which is owned and operated by Fantex. The directors of Fantex can, at their sole discretion and at any time, convert all your Foster shares into common Fantex shares, at any ratio which they determine to be fair. Or, more realistically, they can just go bust: after all, as the prospectus notes, they have no experience in this business. And if they go bust, then the holders of the tracking stock will end up owning about 1% of a bankrupt company, no matter how successful Foster is. As the prospectus says:

While we intend for our Fantex Series Arian Foster to track the performance of the brand, we cannot provide any guarantee that the series will in fact track the performance of such brand. The board of directors has discretion to reattribute assets, liabilities, revenues, expenses and cash flows without the approval of shareholders of a particular tracking series, which discretion will be exercised in accordance with its fiduciary duties under Delaware law and only where its decisions are in the best interests of the company and the stockholders as a whole.

In other words, when the directors decide “to reattribute assets, liabilities, revenues, expenses and cash flows”, their duty is to Fantex, the holding company, and not to the chumps with the Foster shares, who between them account for less than 1% of Fantex’s equity. And in general, as the prospectus also says, “any of our tracking series will be subject to the risk associated with an investment in Fantex as a whole”.

This investment, then, is basically the worst of all possible worlds: if Foster fails, it fails, and if Fantex fails, it also fails. And even if they both do quite well, you’ll only be able to profit on your investment insofar as a completely separate business — the Fantex stock exchange — actually works.

Fantex isn’t looking to raise a huge amount of money here: $10 million should be achievable, given the vast sums bet on fantasy leagues every season. You only need 5,000 chumps investing $2,000 each and you’re there. So Foster is likely to get his cash. But after that, I can’t see this thing going well. Football players are notoriously bad at organizing their finances; is Foster really likely to manage to timely file his mandated Quarterly Report, which “shall detail all Brand Income earned during such quarter, detail the calculation of the Brand Amount for such quarter with respect to such Brand Income, and provide such additional information and certifications required to be included in the Quarterly Report, including such matters as specified in Exhibit E”, within ten days of the end of every calendar quarter, for the rest of his career?

Some time quite soon, Foster is going to receive a $10 million check from Fantex; if he’s typical of most 27-year-old star football players, he’s likely to spend most if not all of that money pretty quickly. But for what will probably be the rest of his life, he’s going to be burdened by what is essentially a private 20% income tax, over and above everything he owes to the government, and to his creditors.

There might be people out there who like the idea of buying and selling stock in Arian Foster — speculating on the fortunes of someone else. But if they stop to think about what they’re doing, they’ll probably realize that it’s pretty distasteful. What they’re trading is the present value of Foster’s future earnings: they’re saying that in many years’ time, long after Foster has left the gridiron for good, they will be sitting there, with their hands out, every quarter, demanding from him 20% of everything he earns. Here’s how the Fantex website puts it:

IT DOESN’T HAVE TO END AT RETIREMENT.

This is a stock linked to the value and performance of an athlete’s brand, not the person. When the athlete retires, their brand may or may not continue to generate income into the future (e.g. endorsements, appearances, broadcasting, etc.). As long as the brand continues to generate income as defined in the brand contract, Fantex, Inc. is entitled to continue to receive payments pursuant to its brand agreement.

This kind of language is deliberately dehumanizing: the athlete is referred to not as a person but as a “brand”, throughout. And the racial overtones are unavoidable: Fantex’s About page features four grinning middle-aged white men, while the man they’re taking 20% of is young and black. This isn’t slavery, this isn’t ownership. But the rich white businessmen are buying something for their $10 million, while Foster is legally binding himself to writing substantial checks to those businessmen, and/or their successors, every three months, for what is quite likely to be the rest of his life.

Before you put any money into Fantex, then, ask yourself two questions. First, do you want to make a really stupid investment? And second, do you really want to buy shares in a company which treats young black men as property to be acquired and then privately taxed? Because that’s exactly what you’re going to be doing.

Comments
20 comments so far | RSS Comments RSS

20% of a 27 year old running back seems like an awful deal. running back performance falls quickly at age 30 in the vast majority of running backs.

so its unlikely to be a good investment because of that.

Also this would make much more sense to invest in a younger athlete who hasn’t made a ton of money. Like a late first round pick.

Posted by sditulli | Report as abusive
 

I agree, that this type of investment doesn’t make sense to invest in Foster, he’s halfway or more through his career and his carry numbers are pretty high, so the wear on his body is probably even higher than average for his age. Would make more sense in a young QB or someone that could have a much longer career.

However, having seen interviews and following him back when he was on twitter, I think he’s a bit more intelligent and will turn around and invest most of the 10 million. I think it will be a great deal for him.

Posted by MrDan232 | Report as abusive
 

Finally, in the last paragraph, we learn what ax Felix has to grind:

“do you really want to buy shares in a company which treats young black men as property to be acquired and then privately taxed?”

Felix, would you mind sharing the part of the Prospectus where it talks about limiting the scope to young black men? Or did you just make that up? If you simply made it up, then you’re a liar by definition and we have every reason to discount your other arguments.

Posted by BigHackAttack | Report as abusive
 

Wow. You’re trying to make this about race? Dude, you’re disgusting propaganda ought to get you banned from journalism. You’re sick.

Posted by WebbyOne | Report as abusive
 

While I’m not at all familiar with the economics of the NFL, there could be a niche for something like this in MLB. Players in their second and third years frequently sign long-term guaranteed deals that potentially leave tens of millions of dollars on the table, in return for the guarantee that they will reach that big deal. Perhaps more than in the NFL, there is a high probability of these deals working out for the team.

Trading it as a pseudo-stock is pointless, however. Clearly chump-seeking behavior. Instead phrase it as an insurance policy.

Posted by TFF | Report as abusive
 

It might be distasteful, but the amounts involved makes it more palatable. There aren’t many people, I suspect, who will end up paying back the initial $10m on their future earnings, to say nothing about the time value of money. And a personal bankruptcy would eliminate the 20% burden if things get really bad (and Arian could still have a multimillion dollar house after bankruptcy).

It’s a scam, but the athlete isn’t the victim. That might change when a rookie sells out for a low price, but right now, it hard to call it exploitation.

Posted by AngryInCali | Report as abusive
 

Not to mention that the sole book-running underwriter is Fantex Brokerage Services, so the offering is being sold through a potentially (?) conflicted broker.

Posted by StuartG | Report as abusive
 

Nowadays, the entire reason for the stock market’s existence is to separate chumps from their money.

Posted by Strych09 | Report as abusive
 

even hinting of a comparison of this scheme to slavery is absolutely absurd and a bald-faced insult to the descendants of slaves. You, sir, need to pick up a textbook and learn what slavery was before making such silly statements.

Posted by elanmo | Report as abusive
 

I would consider IPOing myself if I were pretty sure that investors would overvalue my future earnings. But the market for this sort of thing is not deep – it’s never been done before, so it’s probably going to be limited to fans. Fewer bids, quite possibly a lower IPO price. Meaning my investors come out ahead.

Or I would consider IPOing myself if I could invest the money in something that would produce a sufficient return to come out ahead. Maybe a business – but why not just get a bank loan or a private equity investment in the business?

Or, alternatively, if I were sure Fantex would go under, I’d IPO myself. I’d better be sure, though. Although I certainly hope they do – I share Felix’s aversion to what this says about the character of Fantex’s owners. They probably know they’re taking advantage of him.

Posted by weiwentg | Report as abusive
 

This article should be shown to any person ever thinking about investing in a start-up with some oddball idea about making money.

Posted by HamilcarBarca | Report as abusive
 

Chumps….you’ve got to love ‘em.

Just buy a share of a racehorse. Same idea.

Posted by Missinginaction | Report as abusive
 

Would the obligation be dischargeable in bankruptcy? I would think if 80% isn’t sufficient for survival there may be a problem and I assume pension could not be considered income. How much control over expenses and income would be retained would make for a complex contract.

Posted by MyLord | Report as abusive
 

Typical stock market grand bargain. Everybody is just a “brand” of one sort or the other. In health care you are called a “tier.” The whole football industry is a slave trade or tax rip off to build the arenas, and a eco hazard, to boot. Additionally, a majority of those players are all tore up physically, and injected with steroids at their injury sites so they can continue playing. I have seen many that when their carrier is over, usually by 35 – 40, they have so many injuries, they end up on oxycontin (opium) for the rest of their lives. They also need treatment for brain injuries and the mental health issues associated. The sick system that is current America, likes to incarcerate young black men for smoking pot, but look what is going on behind the looking glass in this foul industry. The Coliseum lives, invented by a twisted emperor, ram on slaves.

Posted by 2Borknot2B | Report as abusive
 

I am not a law expert, much less a US law expert.

But logically, because a footballer lifetime income mainly comes from the time they are on the field, and therefore, would it be normal that he will save part of it in the form of investment in anticipation of future income when he retires. According to what I read, in that case, this poor chap can potentially be paying a lot more than the 20% he thinks he is going to pay (assuming everything goes as planned.) because the future income from the investment will be subject to that 20% charge as well. In that sense, what about if he loses money from his investment, can he claim it back from Fantex (just like tax credit)? I simply cannot see how this can work – too many loopholes and too many ifs.

Posted by winkyshark1932 | Report as abusive
 

Statistically, 65 percent of nfl players go bankrupt two yrs afterr retirement. What will his brand be? I mean, he s not jordan. What revenue streams will he have? Fox or espn analyst at best. This is a new pyramid scheme, and yes this is 21st century slavery!

Posted by deuce2 | Report as abusive
 

Mr CatFish,

Lighten up geezz. It’s called gambling.You want to call everyone the go to Vegas chumps? Or the horse races? You should like an old angry black man mad at the world. Nobody is making anybdy do something they dont want to. Speaking of DEHUMANIZING people… have many times did you call people who did invest,a chump? Don’t refer Foster to a brand but compare investers/gamblers to chumps? That’s okay, right? You’re an freaking idiot.

Posted by speedracer10 | Report as abusive
 

If Fantex approved by the SEC, other firms could offer public trading platform on other alternative asset classes based on the same model, no?

Posted by Lightoflondon | Report as abusive
 

We are happy to answer any questions you may have, please call us between 9:30 AM ET and 8:30 PM ET @ 888-905-5050

The Fantex Brokerage Services Team

Posted by Fantex | Report as abusive
 

We are happy to answer any questions you may have, please call us between 9:30 AM ET and 8:30 PM ET @ 855.905.5050.

The Fantex Brokerage Services Team

Posted by Fantex | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •