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Fantex Sounds Fun, but It's Too Risky for Most Investors

(Cary Edmondson/USA TODAY Sports)

(Cary Edmondson/USA TODAY Sports)

Apple. Facebook. Twitter. Vernon Davis?

If Fantex Brokerage Services — a company attempting to create a stock market centered on the future earnings potential of athletes — has its way, 49ers Tight End Vernon Davis may be the next must-buy stock.

Starting next week, Fantex will issue 421,000 shares of Vernon Davis at $10 a share. Earlier this year Fantex invested $4 million in Vernon Davis in exchange for 10 percent of all his future earnings. Such earnings include player contracts, endorsements, and post-career revenues.

What is Fantex and How Does it Work?

Fantex is attempting to create a stock exchange where the assets purchased and traded are not based on a company’s earnings, but an athlete’s speculated future cash flows. Athlete brands will go through an initial public offering like any other company on conventional exchanges. However, Fantex player stocks will not be sold on conventional exchanges such as NASDAQ or NYSE, but will instead be sold on Fantex’s website exchange.

In addition, Fantex will skim a 1 percent transactional commission from each of these share purchases. However, it is important to know that when investors purchase a share of an athlete’s brand it will only mimic ownership. Not all of an athlete’s income is tied to an asset valuation and Fantex places troubling restraints on investors, that I will expound upon.

Fantex remains an unstable startup that needs additional funding to remain operationally viable. To be clear, Fantex shares are not fully guaranteed and may in fact be converted into company stock. When you buy a share in Vernon Davis or any other athlete you are not simply buying an athlete share, but also investing in Fantex. Fantex is clear about this in their preliminary prospectus:

“We will need to obtain additional funding to acquire additional brands and 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 and we may be forced to significantly delay, scale back, or discontinue our operations.”

What are the Advantages?

Athletes clearly stand to gain significantly with Fantex. They stand to gain a large infusion of cash from Fantex while increasing their personal brand equity with every day fans. Athletes may be promising a future percentage of their earnings to Fantex, but the potential to increase attachment between their public personas and every day fans is immense.

Investors stand to potentially gain a significant amount if athletes prove to be shrewd investments. If athletes who agree to such arrangements are able to stay healthy and marketable, investors will see initial asset value appreciate steadily. If Vernon Davis stays healthy and has a productive post-NFL career as a broadcaster the value of a Davis share will dwarf the initial $10 per share cost. Imagine buying stock in Charles Barkley during his hay day as a player before his lucrative post-NBA career took off.

What are the Risks?

Investors will also be exposed to significant risk. A player’s stock is directly tied to their health and marketability. As a result, certain sports and certain positions offer less risk and variability. For example, NFL players are at risk of significant and potentially career ending injuries during any game. If Vernon Davis blows out his knee his stock could tumble rapidly. Furthermore, if a player is embroiled in off the field issues it could prove even more devastating to a stock. Imagine having invested in Ryan Braun, Aaron Hernandez, or Lance Armstrong.

Furthermore, these securities are not fully guaranteed. As aforementioned, these investments are contingent upon Fantex remaining operationally viable. Fantex needs to raise additional funds before becoming a sustainable company. In addition, Fantex retains the right to convert athlete shares into company stocks. This is a large inefficiency in the Fantex market and should serve as a red flag for common investors.

The Cautionary Tale of Arian Foster

The company has already had its share of troubling headlines with Houston Texans’ running back Arian Foster, the first Fantex athlete. Foster agreed to give Fantex 20% of his future earnings in exchange for $10 million. However, Foster injured his back right before last season’s NFL playoffs and coincidentally before his IPO on Fantex. As a result, Fantex pulled his IPO and Foster lost his $10 million. His injury highlighted the potential risks with share purchases linked to athletes.

Fantex may be able to provide investors with a lucrative new market focusing on speculation regarding an athlete’s future earnings. Fantex may prove to be a desirable infusion of cash for many athletes while raising their brand equity. Fantex may even morph every day fans into brand ambassadors for a specific athlete as well as savvy analysts of an athlete’s financial future. However, Fantex does come with very significant risks that investors should be aware of before trying to establish equity in their favorite athlete’s future earnings.

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