What happens if athletes become stocks?

October 31, 2013: 2:31 PM ET

Fantex plans to launch an exchange on which investors can buy and trade shares of their favorite athletes. Whether it will succeed is a big question.

By Daniel Roberts, writer-reporter

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Arian Foster

FORTUNE -- At first glance, the ability to invest your money in an individual football player, much like betting on a horse, might seem like the kind of thing that would ruin the sanctity of American team sports. After all, betting on baseball is what got Pete Rose banned for life. And the traditional notion of fandom involves rooting for your team, rather than one individual because you have money riding on him.

But the investors behind Fantex Holdings, a new platform that seeks to offer up shares in pro athletes as equities for trading, think it's simply a natural progression from fantasy football, an industry that had more than $1 billion in revenue in 2012. (And experts say there's nothing illegal about the idea.) 

Under Fantex's plans -- detailed in an S-1 prospectus filed with the SEC on October 17, the company would issue "tracking stocks" for each athlete in its stable; each stock would launch via its own initial public offering. Investors buy shares on a closed exchange only at fantex.com with each worth a stake in the athlete's gross "brand income" in perpetuity -- that includes team contracts, money from endorsements during and after the pro career, coaching revenue -- anything related to his or her brand as an athlete.

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Fantex announced earlier this month that its debut "stock" would be Arian Foster, the Houston Texans running back. Much of the initial press doubted any other athlete would be convinced to follow. But today came news that a second football player has signed on: Vernon Davis, the San Francisco 49ers tight end. The Foster IPO will offer 1.06 million shares at $10 per share. If it is successful, Foster will get $10 million from Fantex, which in turn will get 20% of his future earnings. (The shares that investors get will "track" the fortunes of Foster and fluctuate along with the value of his brand; Fantex says shareholders will get dividends but cautions in its risk summary that shareholders do not actually own any part of his brand.) Davis, meanwhile, took a smaller deal: He'll get $4 million from Fantex in exchange for 10% of his future earnings. Foster goes public first; Fantex will begin taking reservations for his IPO next week. (It has not yet filed an S-1 for Davis.) If demand for the Foster IPO isn't high enough to sell all of the 1.06 million opening shares, the IPO will fizzle, since Fantex plans to use the IPO to finance its fee to Foster.

The strangest thing about Fantex may be that, according to the S-1, "the brand contract is intended to be effective in perpetuity." That means if you invest in Arian Foster, hypothetically, you have him until his death. But Fantex's ambitions are even grander. CEO Buck French, a Harvard Business School grad who sold his software company OnLink for $600 million in 2000, thinks it could last beyond the grave. Take Peyton Manning. "His brand will continue to generate income well past his life, in my opinion," says French. "Now, how long past, who knows. But he's up there from an iconic standpoint."

If Fantex is successful, it's tempting -- and perhaps for some depressing -- to imagine football games watched by suited Wall Street types waving bills around like they're at the stock exchange, rooting for Tom Brady only because they've invested in him. But the people who might take interest in Fantex are more likely to be fans of the players listed. Making a Fantex investment will be more like buying a stake in the publicly owned Green Bay Packers was in 2011 -- more like a souvenir.

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A risky investment

Don't expect people to pour their life savings into an Arian Foster IPO; many experts say the risks of investing on Fantex could outweigh the rewards. And what are the risks? For one thing, a player could get injured, and just like in fantasy football, you'd be out of luck -- except this time it's real money you'd be losing. "I find that to be the riskiest part of all of this," says Stephen Wendell, cofounder and COO of fantasy platform Reality Sports Online. "And it's not at all unlikely that [Foster] will get hurt." Indeed, he already got hurt. Three days after Fantex announced its launch, Foster left an Oct. 20 game against the Kansas City Chiefs with a hamstring injury. The Texans next play on Sunday; Foster currently isn't practicing.

Fantex's S-1 notes that if a player is injured, Fantex can convert your stock to another player's, but there is no guarantee it will be worth anything. In fact, Fantex will have a lot more power than an average fan and uneducated investor might realize. By investing in the Arian Foster IPO you'd really be buying shares in Fantex, which will pass Foster his $10 million cut if and when the IPO succeeds, and hypothetically, return dividends to you based on market demand. The securities can only be bought and traded on fantex.com, not through E*Trade or anywhere else. And, as outlined in the S-1, "Our board of directors may convert the shares of Fantex Series Arian Foster into platform common stock at any time."

Fantex will dictate the rules of this game. And it is being transparent, as SEC rules require, about the risks involved. On its website, click "View Risks" and you'll see a laundry list, such as, "Fantex, Inc. has incurred significant losses since its inception and anticipates that it will continue to incur losses in the future." It starts to feel like Fantex is an elaborate PR stunt for Arian Foster's personal brand -- which, if it fails, is what this indeed will have been.

Injury isn't the only event that could send a player's stock sinking. Since the Fantex "stock" is meant to cover a player's entire brand and extend off the field, a personal scandal would have the same deleterious effect. Your player might excel in Sunday's game, but if he's arrested Tuesday for a DUI, your investment will suffer.

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None of those risks may matter at all to the type of people who will want to invest in Foster. At only $10 a share, what's to stop a diehard Texans fan from buying 100 shares, just for fun? If he gets injured or plays poorly, a real fan would care more about what that means for the team, not for his personal investment.

Besides, French doesn't see athletic performance as the core of this venture anyway. He positions Fantex as a brand-building vehicle for after an athlete retires. "By definition when an athlete is no longer an athlete, their brand diminishes or dies," he says. "Our whole premise is ... we actually look to help build the attributes beyond just being an athlete. Arian Foster has those brand attributes."

Surprising stars

Does he? Foster is no household name. He had $1.75 million in endorsement income in 2012 -- high for the NFL, where it's rare for a non-quarterback to rack up deals, but low for high-earning athletes in other sports -- landing him at No. 39 on Sports Illustrated's Fortunate 50 list last year. (Vernon Davis has never made the list.) Howard Wasserman, law professor at Florida International University, says, "Foster is one of the best on the field, but he's not an internationally marketable star -- he's not LeBron James or Peyton Manning."

Wendell, of Reality Sports Online, concurs. "I would have launched this with a player like Andrew Luck," he says. "He's a quarterback so he has more years left." Foster isn't even the best running back in the league this season, at least going by fantasy value. Most would say that's Jamaal Charles of the Chiefs, who has 635 rushing yards to Foster's 542 and is averaging a touchdown each game. Davis, meanwhile, is even less of a star. With 518 receiving yards, he has been huge for the Niners on the field but has struggled off of it: Just this month he lost an endorsement deal with Vita Coco after tweeting positively about the drink BodyArmor; his other deals are minor.

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Selling yourself short -- literally

Dave Hollander, sports management professor at New York University, sees another potential issue, though unlikely, with athletes listed on Fantex. Might a player short his own stock? "Any time a player can manipulate results to lead to his own enrichment, that's a problem," he says. Indeed, sports events have been thrown in the past. Just this week, an anonymous NBA GM told ESPN that his team will tank the season on purpose so as to have good prospects in the next NBA Draft. What if a player and an investor conspire to sell shares at a high value just before he blows a game, killing the stock? French says the Fantex platform protects against that with strict rules: No one can own more than 1% of any athlete stock, and no one can sell the stocks short. "It's about creating a fair marketplace," he says.

Corporate sponsors

Perhaps the biggest hurdle Fantex faces is that to participate in the exchange, athletes need to disclose the full revenue from some of their endorsement deals, which is unlikely to sit well with corporate giants. "To me the real issue will be what the companies think about it, more than the leagues or the players' associations," says Michael McCann, sports law professor at the University of New Hampshire.

Under Fantex's rules, only deals that represent more than 10% of the athlete's "brand income" would need to be disclosed. Very few athletes have deals of that size, but some do: Rory McIlroy's estimated $100 million Nike contract -- since his winnings from golf fluctuate year to year -- would be one example. Chicago Bulls player Derrick Rose has an Adidas contract thought to bring him some $10 million per year, out of a total $33.4 million in overall combined earnings. If Rose did want to join up with Fantex, it's hard to imagine Adidas giving the green light to make the value of his endorsement public.

French says in response that Fantex is not working with either of those athletes, but in such an instance, the athlete would need to ask for a release from the sponsor's confidentiality clause -- and if not, that deal would simply be excluded from their income before taking the security public. All future deals a star makes after signing with Fantex would need to be disclosed.

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That's a pretty restrictive rule -- and one an athlete would be very hesitant to abide by, lest it put future endorsement deals in jeopardy. So what kind of athlete would want to sign on? Those with only minor endorsement deals could use the $10 million windfall, but ironically, those players aren't likely big enough to get enough investor interest. The stars who are huge enough -- the Lebrons or Kobes -- don't need another $10 million so badly that they would give a company like Fantex any percentage of their future earnings.

More sentimental critics might say that something like Fantex simply turns the football field into a stock market, encouraging people to cheer on one guy over a whole team. But that way of watching football -- or any sport -- has already long-since been ruined, helped in part by fantasy football, which lionizes individual stars. "I think today there are fewer fans of teams than there were at one point," says Reality Sports Online president Matt Papson. "A lot of people are as concerned, or more, with the success of their fantasy team as they are with the team they root for. So [Fantex] seems like another step in that process, letting people invest in individual players."

Despite the many risks, if enough fans find it appealing to "own" a piece of their favorite player, Fantex could succeed with its Foster IPO, though tight end Davis is even less of a sure bet. (Its big-picture vision, which is to expand into entertainment and Hollywood, offering similar stocks for non-athlete celebrities, is more of a stretch.) If it does work, you can practically imagine a real-time ticker on the bottom of ESPN, with beer-swilling fans calling brokers from the sports bar telling them to sell. "The Nasdaq was up today, and meanwhile, on Fantex, shares of Eli Manning took a big hit ... "

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About This Author
Dan Roberts
Daniel Roberts
Fortune

Daniel Roberts covers a wide range at Fortune with a focus on sports business, tech, entrepreneurship, media, and food and beverage. He is the lead reporter on the 40 Under 40 franchise. Prior to joining Fortune in 2010, he was a staff reporter at The Bronx Times and reported for the New York Daily News and The Wall Street Journal. He holds a B.A. from Middlebury College and a master's in journalism from Columbia University.

Email Daniel Roberts | @readdanwrite
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