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.

*********

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.