A San Francisco-based startup has created a new financial product that may push sports betting to a new level, challenging regulators and existing law.
Fantex, Inc. wants you to buy stock in Arian Foster, the Houston Texan’s Running Back. As an investor, you can receive up to 20% of Foster’s future earnings from his playing contracts, endorsement deals, broadcasting contracts, or any other income that he receives from contracts attributed to his brand.
If Foster performs well on the field and receives a lucrative new contract, owners of his tracking stock can expect to see the stock price rise and may even see a dividend. If he does not perform well, or he gets injured the stock price may decline.
Fantex, Inc. is a San Francisco-based brand brokerage service set to launch a $10.6M IPO, $10M of which will go directly to Foster to purchase a 20% equity share in his brand. Investors will purchase a share in a Fantex, Inc. tracking stock tied to the equity stake in Foster’s brand, which will potentially pay dividends. This tracking stock will only trade on Fantex Brokerage Services (FBS) trading platform. Fantex Holdings, Inc. owns both Fantex, Inc. and FBS.
The average career for all NFL players is 3.5 years, but Fantex is attempting to capitalize on a player’s brand for his entire life – allowing investors to pick the long-term “winners” (e.g. Peyton Manning) or gamble on a high-risk rookie with great numbers (e.g. Aaron Hernandez). This is all contingent on Fantex acquiring an equity stake in the athlete’s brand. As of now, Foster is the only athlete on Fantex’s roster.
While this may seem like a fun alternative to a fantasy football fiend or an interesting hedge for a sports fan, there are huge risks with this investment. Fantex characterizes this as a “highly speculative” offering and notes that it involves a “high degree of risk.” Setting aside the inherent risk of buying stock in an athlete who could have a career ending injury at any time, there are two major issues that many investors might not initially consider.
First, Fantex did not speak to the National Football League (NFL) about this offering. The NFL has robust control of its brand and its players, and the League generally has a loud voice in the types of contracts that its players enter into. Fantex is aware of this risk, as it is mentioned in their website’s risk section, and this could potentially lead to litigation between Fantex and the NFL.
Second, John Elway, the executive vice-president for football operations of the Denver Broncos, is a board member of Fantex Holdings. Thus, he potentially stands to gain financially from Arian Foster’s performance on the field – possibly against his own team, creating at least the appearance of a conflict of interest. This too may lead to litigation with the League, or the NFL Players’ Association (the players’ union). The NFL will likely have great reservations about this conflict.
Importantly, none of these risks fall to Fantex; they are all borne by the investors. Fantex will receive some operating capital from the IPO, and will charge trading fees on the FBS. Thus, if the NFL or the NFLPA stop the trading, only the investors will see a loss. Nonetheless, Fantex is creating a new market that may not only be fun, but also lucrative for the arm-chair quarterback and the Wall Street maven alike.