Start-up Fantex To Sell Stock In Professional Athletes, Sort Of

If you’ve ever wanted to invest in the future earning potential of a professional athlete, say hello to Fantex, a San Francisco start-up that is offering shares in an IPO named after Houston Texans running back Arian Foster. To kick start the new company, Fantex paid Foster $10 million, in exchange for a 20% share of Foster’s future earnings on and off the field for the rest of his life. Fantex is banking on Foster having a huge upside and will work with the player to enhance the value of his “brand.” To recoup its investment, Fantex is banking on football fans and other investors who want a piece of the action.

It’s a simple idea, in theory, and makes you wonder why it’s never been tried before. Well, it turns out that a simple idea in theory is quite complicated in execution, and carries substantial risks for all parties. It also turns out that something similar has been tried before, and failed.

When you peel away the pizzazz, you find that investors are not actually investing in Arian Foster. They are investing in Fantex, which has invested in Arian Foster. For as little as $10, you can purchase one share in the Arian Foster IPO and receive a “trading stock.” That trading stock can then be sold only on a private exchange created by Fantex. The value of your trading stock isn’t specifically tied to Foster’s success or his future earnings. It’s tied only to Fantex’s success and the vagaries of its new private exchange. Foster’s success on and off the field may bear on Fantex’s success, or it may not. Financial reporter Felix Salmon summed it up well at Reuters:

This investment, then, is basically the worst of all possible worlds: if Foster fails, it fails, and if Fantex fails, it also fails. And even if they both do quite well, you’ll only be able to profit on your investment insofar as a completely separate business — the Fantex stock exchange — actually works.

Maybe Fantex is betting that the millions of sports fans who spend hundreds and thousands of dollars on fantasy games — and millions of dollars on sports gambling — will be willing to investment ten, twenty, a hundred, a thousand dollars for a stock tied — however loosely — to Arian Foster. In other words, its an investment for fun, not for diversifying your portfolio or enhancing your net worth.

A company called ProTrade tried this idea in the mid 2000’s and failed. ProTrade was the brain child of Mike Kerns, who had experience with venture funds and sports agents, and Jeffrey Ma, one of the MIT students made famous in the movie “21” for outsmarting Vegas at the blackjack table. ProTrade used proprietary statistics to set initial stock prices on professional athletes. Participants then bought and sold the players’ stock with a virtual, ProTrade-only currency. Stock prices then adjusted based on market forces. Kerns and Ma hoped to earn revenue by selling subscriptions at $5 to $100 each to the millions of sports fantasy players. It never happened. ProTrade eventually morphed into CitizenSports, which made sports games and apps for Facebook and other social sites. Yahoo! bought Citizen Sports for $40 million to $50 million in 2010.

Kerns spoke at the On Deck Conference in San Francisco this week and was asked about Fantex. He referred to the business model as legalized gambling and wasn’t particularly optimistic that Fantex would be more successful than ProTrade was. He also suggested if fans really want a stake in the success of a pro athlete, they should invest in young, superstar athletes who face financial hurdles just getting to the pros.

Young golf prodigies benefit from just that kind of investment, Kerns explained. Members of the golf club where a young prodigy plays often pay for the golfer to attend qualifying school in exchange for a percentage of future earnings if he makes the PGA tour. According to this Golf Digest story, the practice is widespread even though most investors never recoup their investment.

Imagine if the young golfer investment model were used on young baseball prodigies, either privately, or through a Fantex-type company. Now that MLB has placed a cap on signing bonuses for players selected in the Rule 4 draft, only first-round draft picks see multi-million dollar bonuses. But what if the scouts miss? What if there’s a hidden jewel not selected until the eighth round? Or the twentieth? Shouldn’t he be able to finance his current earnings through a take of future upside?

And if Fantex can make a deal with Arian Foster, why not make one with Mike Trout? The Angels don’t seem interested in discussing a multi-year deal with Millville Meteor, but why should he wait to see a big financial return on his current performance? Shouldn’t Trout be able to insure himself against a devastating injury in year four or five, while still under Angels’ control? Endorsement deals provide some financial security. Isn’t a Fantex-type deal just an extension of selling the Trout brand?

A young minor-league pitcher named Randy Newsom tried this very thing in 2008. He started a company called Real Sports Investments, LLC (later Real Sports Interactive) and sold shares in his future earnings. Like Fantex, Randy and RSI received a great deal of positive publicity at his company’s launch. But then Randy and RSI fell off the map. The websites for Real Sports Investments and Real Sports Interactive have dead links. And Randy Newsom? He got a law degree at Boston College and worked for a law firm in New York City. According to LinkedIn, he’s now the director of business development for, you guessed it, Fantex.

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The risks for investors are substantial, and perhaps no less so for Fantex. Just days after announcing the Arian Foster IPO, the running back had one of the worst performances of his career and left the Texans game against the Chiefs in the first quarter with a pulled hamstring. Fantex wanted to avoid this kind of bad timing. The company had planned to launch before the NFL season started. But the Securities and Exchange Commission and state securities regulators charged with approving the IPO prospectus needed convincing. The legal wrangling led to delays.

For now, it’s a waiting game. In a few months, we’ll know more about how many shares Fantex sold in the Arian Foster IPO and whether this is a trend likely to continue.




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Wendy writes about sports and the business of sports. She's been published most recently by Vice Sports, Deadspin and NewYorker.com. You can find her work at wendythurm.pressfolios.com and follow her on Twitter @hangingsliders.


17 Responses to “Start-up Fantex To Sell Stock In Professional Athletes, Sort Of”

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  1. Pale Hose says:

    So Fantex gives Foster ten million dollars. In exchange Foster writes Fantex a check for 20% of every check he receives. Fantex then sells me a trading share based on that income stream. Then what? Do I receive a dividend every time Fantex receives a check? Or, do I have to hope other people drive the price up?

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    • Jason B says:

      I think you frame your share(s), hang them on the wall of your man cave, and say to your friends “Look! I own five shares of Arian Foster!”

      And they say “Neat!”

      And you have a Pabst.

      Expecting to make any money off of this is not unlike expecting a loan to a family member to be repaid: possible, but not particularly likely.

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    • Spencer D says:

      Shouldn’t it attempt to resemble some sort of Asset Backed security where Fantex is the originator?

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    • BubbaBiscuit says:

      Well, it is currently tied to Foster, but the business as a whole has to survive there also. With the current contract and endorsements Foster has, the 20% of that comes to around $5 Million. The hope on Fantex’s part is that he will sign another big contract, get some more endorsements, and will get a job around football after he finishes playing, either TV or as a coach. If he decides to not do anything related to football, they don’t get the 20%.

      Running backs don’t age well in the NFL, especially those already with health issues, add to that the league is becoming more and more about passing and NFL contracts are not guaranteed, I can easily see why Foster would take this deal, but see very little chance of this being a good investment for Fantex or for anyone buying into Fantex “shares”.

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      • crw says:

        Agreed. Markets tend to reflect all available information. All you need to see to avoid this is the Houston Texans IR report over that past few years, NFL RB avg. years played, and the fact that he jumped at 10 million relatively early in his career. Very cool/ingenious idea, not the best asset to make the poster boy.

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  2. bennoj says:

    In 2003 British racing driver Justin Wilson floated himself (as Justin Wilson PLC) on the London Stock Exchange in order to raise money to get a drive in Formula One. For a minimum £500 investment, investors were supposed to be able to double their money and then be entitled to 10% of his earnings for the next decade (unclear from what I’ve read, but I assume that 10% of his earnings went into a pool that investors shared). Wilson only raced in F1 for a year, but has been fairly successful in Champ Car/Indy Car in the US and endurance sports car racing since. Haven’t been able to find much info on how his investors have done, although apparently approx. 900 people did invest.

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  3. Brett W says:

    Couldn’t Arian Foster just become an employee of Arian Foster Inc., a corporation that sells Foster’s football rights to NFL teams and his marketing rights to the highest bidder, and take investors’ money directly? He could cut out the middleman. Granted, raising $10 million in an IPO for an NFL running back would be a stretch, but his only loss of future income would be to whatever dividends the Inc. board agrees to distribute to the shareholders. If legal, that seems like it’d be a better situation for the athlete and no different or perhaps preferable to the investor.

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    • Daniel says:

      First, I don’t think that would be better for both. The only way it can be better for both is if they make more money or save money on expenses like taxes. It’s still the same amount of money we’re talking about.

      Second, I’m not an expert in agency/employment law, but the last time I did research on the subject, I learned that the U.S. considers team athletes to be employees of the teams (or the league). I would imagine structuring it like that would be illegal. The teams couldn’t pay a shell company; they have to pay a player.

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  4. Adam Dunn says:

    Sounds like a convoluted version of Bowie Bonds. Bowie raised $50M for a stake in the earnings of his previously released 25 albums, back in 1990. The bond has had a very solid 7.9% return.

    Celebrity bonds on Wikipedia

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  5. gandriole says:

    Star Street tried something similar and morphed into a daily fantasy game.

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  6. Colin says:

    This is basically an insurance company, but instead of insuring the athletes themselves, they let their investors do it directly rather than passively.

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  7. smiley54663 says:

    ProTrade was more of a fantasy stock market game where users buy and sell players and redeem profits for prizes. There’s a cool spinoff called athletexchange.com that’s still going on and offering out prizes.

    As far as RSI goes, I bought a couple shared of Randy Newsome and I was at least entitled to some of Newsome’s future earnings. RSI isn’t quite like FanTex for that reason… Buyers of his stocks are likely to never see any benefits from owning shares unless the company makes it big and somebody out there buys out the entire float.

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  8. Brad Johnson says:

    There’s a reuters report out there that very clearly describes why it is a bad idea to invest in FanTex stocks.

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  9. The Guy Who Buys Property on Mars says:

    Damn, I can’t wait to spend my hard earned $20 on this!

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  10. Bigmouth says:

    This will end well lol.

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