“It’s real stock, real money, and real athlete brands,” reads Fantex.com. But is athlete stock a real investment?
As a huge sports fan and a stock market enthusiast, I was more than excited when I heard about Fantex. I had been hoping for this for years – what if I could own stock in my favorite athletes? It would be like fantasy football minus the fantasy – a pure way to hold interest in the performance of an athlete and a direct way to profit from predicting breakthroughs and championships.
This was once just a personal hope but it is now a reality. A company called Fantex is up and running out of San Francisco, empowering normal people to legally purchase stock in athletes. Fantex is onto something. It’s a creative idea that will surely be met with open arms from sports fans, gamblers, and fantasy sports connoisseurs.
But the more I looked into it, the more skeptical and discouraged I became. Fantex may be a legitimate company with real securities to offer, but should by no means be considered a legitimate investment.
Some are calling Fantex the next big thing in sports business. I’m throwing the challenge flag. First, let's examine how Fantex actually works.
The Fantex Model
Business Structure: Fantex Holdings owns and operates two subsidiaries: Fantex Brokerage Services (FBS) and Fantex, Inc. FBS operates the trading platform and marketplace. Meanwhile, Fantex Inc. handles the securities, marketing, and contractual issues.
How Athletes Are Turned Into Stock:
1. An athlete agrees to sell Fantex a portion of his future brand-related earnings (contracts, endorsements, etc.)
2. Fantex writes up the paperwork to sell a certain amount of shares to the public at a given price via an IPO.
3. The athlete goes through a pre-IPO quiet period just like a corporation. Fantex follows traditional IPO protocol and issues a prospectus.
4. When shares go public, the athlete is paid upfront and Fantex keeps around 5%. For example, Vernon Davis IPO’d for $4.21 million. Davis was paid $4 million upfront and Fantex took the remaining $210,000.
5. Shares are traded on the Fantex Brokerage Service.
Current Athletes on Fantex:
Vernon Davis (49ers TE): 10% of brand-related income for $4 million. (Actively traded)
Arian Foster (Texans RB): 20% of brand-related income for $10M. (IPO delayed due to injury)
EJ Manuel (Bills QB): 10% of brand-related income for $4.97M. (IPO pending)
How to Track Performance: Athletes have their own quote page, market cap, volume, stock symbol, recent new, etc. on the Fantex.com website. Shareholders even receive periodic dividends for owning shares.
Legality: All of this is perfectly legal – Fantex is registered with the SEC as an alternative trading system (ATS). Fantex is also a member of FINRA, a private organization that regulates brokerage firms and exchange markets.
The Goal: The goal is to invest in a player before his future brand-related income increases. For example, if Vernon Davis ends his holdout with the 49ers and agrees to a massive contract extension, his stock will surely go up.
How the Player Benefits
“It’s fun. I like being a security,” Vernon Davis told CNBC after his IPO quiet period.
Of course, being a security isn’t just fun and games. Selling his future earnings to Fantex removes injury downside and performance risk from Davis’ career.
Athletes are also giddy at the idea of more money upfront. For a player on a rookie salary, a multi-million dollar upfront payment enables a luxurious lifestyle from the get-go.
Problems with Investing in Fantex
Risks expressed in the prospectus: The Fantex prospectus conveys several crucial risks:
- “We have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future.”
- “To date, we have not generated any revenues or cash flow from any brand contract…we may never generate sufficient revenue to become profitable.”
- “We may also need additional funding to continue operations. If we fail to obtain the necessary financing, or fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels”
- “We do not have any experience managing brand contracts.”
Conversion Clause: Fantex reserves the right to convert athlete stock into Fantex common stock. This is a massive red flag, and I am extremely uncomfortable with this clause because it ties the value of the athlete’s stock to the value of Fantex as a company.
In any combination of the previously mentioned risks materialize, Fantex will probably go bankrupt. Athlete shares would then be converted to Fantex common stock, which could become worthless if Fantex cannot pay off their debts.
Risks of Investing in Athletes
Injuries: This one is the most obvious. One injury can kill an athlete’s entire career, even at an early age. Most recently, Packers 2013 fourth-round pick Jonathan Franklin suffered a career-ending neck injury during his rookie season. Per the NFL’s collective bargaining agreement, the Packers are only on the hook for Franklin’s $405,468 signing bonus. He will not make another penny his entire NFL career. This is the harsh reality of playing in the NFL, and investors should not forget it.
At least Fantex acknowledges injury risk. They mention the word “injury” 75 times in Davis’ prospectus.
Collective Bargaining: Player contract and salary cap restrictions play an enormous role on the value and structure of athlete contracts. An unfavorable change in a collective bargaining agreement (CBA) could decimate – or improve – contract values.
For example, if the MLB ever implements a salary cap to reduce the exuberant salaries the baseball players earn, the value of player contracts could be halved. Such action would immediately crush a baseball player’s stock.
Athlete incentive problems: The “oh well, I already made $5 million this year from Fantex” mentality is worrisome. Incentive problems could prevent athletes from playing their hardest, staying out of trouble, and taking precautions to stay healthy.
Impossible to value: Corporate stock is relatively easily valued based on earnings and other metrics, but how do Fantex investors place a numerical value on a two-touchdown performance or a grade-2 hamstring strain? Simply put, they can’t.
Insider trading and Asymmetric Information: Fantex believes it has taken steps to alleviate insider trading and information problems. “If [the athlete] has a material injury then obviously he would have to disclose that to us and we would disclose it to the investors…he obviously shouldn’t and won’t disclose that to other people,” said Fantex CEO Buck French during his interview with Vernon Davis on CNBC.
Personally, I don’t see this as enough of precaution. What’s to prevent one of Davis’ teammates from texting a friend or family member, “sell Vernon’s stock! I just saw him twist an ankle”? Can we really trust trainers to hide injury information from the public sphere? Fantex is simply unable address this issue.
Investing in winners is a losing investment: Athlete stock loses value when the athlete is selfless and takes a pay cut for the good of the team. Players like Dirk Nowitzki, Tom Brady, and Tim Duncan have taken pay cuts to allow his team to sign better talent and contend for a title.
This is a massive conflict of interest. The goal of the game is to win, while the goal of investing is to make money. In some cases, the two cannot exist simultaneously.
Fantex Concept Under Review
All of these problems are united under a central issue: Fantex strives to treat athletes as corporations, yet they are inherently different.
Corporations can be regulated and controlled. They exist to maximize value for shareholders, who directly own and have a vote in the company. Corporations are quite easy to value and news is announced in a timely, organized fashion. Insider trading is met with the fist of the law.
Athletes, however, are not corporations. They are not objects controlled by executives. They have free will; an athlete can take a pay cut, retire early, or ruin his career and his life by breaking the law. Many play for championships and the desire to win – not just to make as much money as possible.
This conflict makes Fantex stock an inherently dangerous investment. Fantex wants to treat athletes like corporations, but can’t do nearly enough to compensate for their differences.
I can see why athletes want to sell stock in themselves. I can see why it would be fun to invest in an athlete. I can see why people are excited by the idea – I like the idea myself and really would like to see the concept succeed.
Yet, Fantex stock cannot be regarded as an investment. Their error in equating athletes to corporations creates too many problems.