Adding Context to the Fantex Public Offering

Part 1 of 3: Legitimate or Emotional Investment?

During the NFL season, millions of fans are emotionally invested in their favorite teams and players. But since Fantex, Inc. filed a preliminary prospectus with the SEC on October 17, the notion of financially investing in professional athletes has generated considerable buzz. After letting the dust settle, a careful reading of the company’s prospectus reveals numerous red-flags regarding this IPO – most notably to potential investors.

At first glance, Fantex’s strategy to raise capital appears pretty straightforward. The company will raise $10 million by selling ten-dollar shares to the general public. Fantex also entered into a “brand contract” with Houston Texan’s running back Arian Foster. Under the terms of this contract, Fantex will make a one-time, $10 million payment to Foster in exchange for 20% of his future earnings. The company expects to enter into similar brand contracts in the future with not only athletes, but also entertainers and other high-profile individuals. If Fantex’s efforts are successful, it will issue dividends to investors. Therefore, the more shares that are purchased, the more dividends investors can expect to receive – right?

As with most IPOs, nothing is ever quite so clear. The details in the prospectus reveal that Fantex lacks any clear business model. More importantly, there is no clear plan for generating a return for investors. Based on the prospectus, it is safe to conclude that any reasonable investor would not purchase shares under this IPO. However, this offering is perfect for those investors who do not actually intend to make any profit.

For starters, days after filing its prospectus, Foster left the October 20 game against the Kansas City Chiefs with a sprained hamstring. Last week, it was reported that the running back would miss the rest of the season due to back surgery. Although Fantex refrained from issuing any comment, there is no doubt that this news renders a public offering in Foster’s brand highly unlikely because there is little value in a football player’s non-NFL brand, if he is unable to perform on the field.

Aside from Foster’s health issues, the details regarding Fantex’s business model and the risks to investors are alarming, if not egregious. The prospectus is littered with countless reasons why an investor should avoid this offering, and similar ones, like the plague. From a business aspect, Fantex has no operating history and is very far from being profitable. Despite only being in existence since September 2012, it reported a net loss of $2.8 million on the date of filing. In light of its claims to “target, access and evaluate brands with the potential to generate significant income,” the company admits that it has no experience in brand acquisition or management. Furthermore, the company plans to finance future brand contracts through similar public offerings. Commencing a public offering every time it acquires a similar brand contract will shield the company’s own assets but, at the same time, dilute the value of stocks issued under the Foster IPO. These are just a few of the risks outlined in the prospectus.

For the prudent investor, the most egregious issue is Fantex’s dividend policy—or lack thereof. Under the typical dividend policy, an investor’s return is based on both the number of shares he or she purchased in an asset and the asset’s performance on the market. In Fantex’s case, however, investors are not actually investing in the brand contract with Foster, his future performance, or any future contracts acquired by the company. Instead, investors are purchasing a “tracking stock,” which merely reflects the economic performance of a separate business entity. This separate entity functions similarly to an escrow account for the money Foster is expected to pay back to Fantex. However, this entity will also bear the company’s out-of-pocket expenses in acquiring and managing future brand contracts. For investors, any “reflection” of Foster’s future economic performance will be highly skewed, at best. Unless the company achieves significant economies of scale with respect to future brand contracts, an investor will never realize any return on his or her investment.

It is clear that, despite filing with the SEC and spending millions of dollars to date, Fantex’s IPO is far from a profit-making opportunity for a prudent investor. Hence, the only members of the investing public who would benefit from purchasing shares in professional athletes are those emotionally invested in their favorite athlete enough to invest despite these red-flags. Whatever the motivations are, in this case, making a profit should not be one.

The problem is that Fantex has disguised its IPO as a legitimate, investment opportunity not just to the general public but, unfortunately, also to Arian Foster. The question becomes whether emotional investments—investments with little, if any, chance of generating a profit—should be allowed under the guise of a legitimate public offering. There is nothing wrong with investing for a reason besides making money. But by virtue of registering with the SEC, a potential offering is more readily perceived as a legitimate investment opportunity. As will be discussed in part two, Fantex’s IPO represents an unintended consequence of the 2012 JOBS Act and its goal of easing the burden on startups seeking to make legitimate, public offerings.



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