For those who don't know, Fantex is a startup that sells real stock in professional athletes to the public, an idea that has garnered the attention of the entire sports world. In my original Fantex article from earlier this month, I outlined some of the specific concerns I had with Fantex, mostly pertaining to the complexities of treating a professional athlete as a security. Fantex’s CEO Buck French read the article and wanted to respond, so we got on the phone with him to get to the bottom of some of these issues. Mkae sure you read Part One of our interview where Buck discusses the Fantex model and his company’s future.
@EquitiesNetwork CEO of Fantex here. Challenge accepted! Let's jump on a call.— Buck French (@buckfrench) July 16, 2014
In Part Two, the conversation addresses some of the specific points in my article. Buck answers some difficult questions about whether the investment community can treat Fantex stock as a legitimate investment.
Will Investors Buy Into Fantex's New Market?
EQ: Given that Fantex pays players upfront I’d imagine that your cost would be pretty high to IPO multiple players in one offseason. Do these upfront costs limit the scalability of your operations?
Buck: The contract is actually contingent upon us successfully raising the capital. We sign the contract, then we set the valuation point based on the contract signing date. We then go to the S1 legislation process with the SEC. Once we're declared effective by the SEC, we can close the transaction and then they trade in the secondary market. We use the proceeds from raising that money through Fantex.com to pay the athlete, which then makes the contract fully in effect.
EQ: There’s a clause in the Vernon Davis prospectus, which establishes that Fantex tracking stock could be converted into Fantex common stock, “thereby changing the nature of your investment and possibly diluting your economic interest in our company, which could result in a loss in value to holders of our tracking stocks.” Can you explain why the stock would ever be converted?
Buck: First off, we cannot convert for two years, and the prospectus lays out all the instances where we convert. It would typically happen when we no longer believe that the brand contract will continue to generate brand income. If the brand contract isn’t generating any income for the tracking series or for Fantex Inc., then we would clearly want to retire the security. Conversion is done at fair market value.
For instance, if we converted the Fantex Series Vernon Davis today, those series holders would become majority shareholders of Fantex Inc. Well, maybe not quite now because we just IPO’d the EJ asset. But my point being is that you would have a third party determine the fair market value of the tracking series and the platform common, and the shares would be converted at a fair market value. But we would really only do that if we didn’t believe the athlete will have any more brand income.
EQ: As an example, if I was a Vernon Davis shareholder and my shares were converted to Fantex common stock, given that Fantex is private, what are my options with those converted shares?
Buck: That would be taken into the consideration of the fair value. If our common stock is illiquid because it is not publicly registered, then that would affect, and obviously discount, the fair market value of the stock.
EQ: What kinds of precautions have you taken to prevent information problems? When a corporation needs to announce something publicly like earnings or some kind of internal news, it's easy for them to just put out a press release so that the public receives the information at the same time. I’d imagine that would be a little bit harder to execute for an athlete, so what kind of measures do you take to prevent information problems?
Buck: Part of the contractual obligation for the athlete is that material information must be disclosed to us. There’s a contractual obligation for them to inform us of material information in a timely fashion.
EQ: So in the case of an injury, the player is contractually obligated with Fantex to not disclose publicly. However, news might break through teammates, reporters, social media, or other things that are outside of your contractual control. Have you considered that aspect of it?
Buck: It’s not the obligation of our business to control third parties, and that’s not unique to our security. You could be sitting on an airplane behind a CEO who's talking to his CFO about the numbers that they're going to release and they don’t even know you hear them. If you go trade on it, then you broke the law. Or take Jamie Dimon of JP Morgan (JPM) , for example. He disclosed that he has cancer. Obviously he determined that it was important for the shareholders to know. JP Morgan deemed it material. His doctor could have told people, his wife, whoever knew in his close circle.
EQ: Do you think that investors should ever be concerned about athletes who would take a pay cut to help the team?
Buck: I think that’s an interesting question, but no, I don’t. I mean I could argue either way. First of all, someone like Vernon Davis owns 90% of his brand income. We acquired 10%. They’re fairly motivated to maximize their return, even if that means deferring their return. I think if you also look at some of those contracts, you’re referring to, I don’t think they actually took a pay cut in a literal sense.
Let's say that they did take a pay cut because they wanted to get more talent on the team. I think Lebron James [of the Miami Heat] did that. What did he get in return? He got two championships, so you could argue his brand is worth more. He invested; he wasn’t taking a pay cut. He invested in the opportunity to grow his brand further by winning championships. Again, you could argue either way. They’re not doing it for no reason. There’s a rhyme behind the reason. You could say that they're doing it in the best interest of what they think is going to help them in the long term.
EQ: The Arian Foster IPO was postponed due to injury. Now there are rumors going around that Vernon Davis is going to hold out from camp and right now his stock is at a low since his IPO. Has this at all affected interest or demand in Fantex?
Buck: That's a hard one to gauge. I think it's definitely generated more awareness and there's more people talking about us. I would speculate that Arian Foster's injury gave people pause in the short term. It just highlighted a risk factor. We postponed the offering because clearly he wasn’t able to play his best. But he's fine, he's back, and he's cleared to play.
Vernon Davis is at camp. Camp started at 9:00 a.m. PT on July 23, and he’s there. There’s no holdout.
As for the holdout scenario in general…you could argue either which way. It could be a short-term issue where fans get a little upset. But in the long run, from our perspective, if he gets [a contract] sooner, that only brings in the cash-flow streams sooner, which to us, is worth more than the way we forecasted it.
EQ: Do you think that a player signed to Fantex has more of an obligation to shareholders to maximize his income than a typical player would?
Buck: Technically, an athlete doesn’t have shareholders. I do. So he has an obligation to Fantex, which is the basis of the security. I think some of the guys [who would take pay cuts] aren't the guys that would probably work with us anyway.
I think being signed to Fantex, in my personal opinion, creates greater sensitivity to their off-field endeavors and persona. I think it heightens their awareness, which I believe in the long run would be a good thing for all because there's now a reason to stay in the good graces, if you will. I’m not saying it's going to cure everything, but it definitely heightens the awareness.
EQ: Thanks so much for you’re time, Buck. You’ve been great at addressing some of the questions I had with the business model.
Buck: Absolutely. I love talking to everyone [about Fantex] because the best way to address anyone's concern is just to educate and to show that there is rigor. There’s controls put in place to make sure that we continue to be good corporate citizens, and at the same time, when you look at the team behind this company, it's an impressive set of executives. We have our reputations and our goal is just to build a great company.
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