A company introducing the first initial public offerings for athletes is causing a stir on Wall Street and in the professional sports world.
The company, Fantex, said this week it had signed up its second client, reaching a deal with Vernon Davis, the star tight end of the San Francisco 49ers. An IPO for Davis would join Fantex’s first announced IPO, an offering for a stock linked to Arian Foster, the Pro Bowl running back of the Houston Texans.
Fantex plans to purchase 10 percent of Davis’ future earnings for $4 million. It hopes to pay for that by selling investors shares in a “tracking stock” that is linked to his economic performance.
Since it was announced two weeks ago, the innovation has prompted debate, and market commentators have raised questions about the sensibility of the deal for investors, citing its complex structure and many risks — not the least of which is the chance of an injury that could cut short a player’s career and earnings potential.
The company effectively has a two-pronged business model. The first part is a sports marketing and management company that signs professional athletes and takes a stake in their future earnings. It hopes to expand beyond football players and into other sports.
The second part is a proposed trading exchange that plans to allow investors to buy and sell interests in the athletes. In order to finance the payments to the athletes, Fantex is trying to develop stocks intended to track their economic performance.
Fantex’s business proposition appears to be a good one for the athletes. A deal allows them to receive a large payment upfront in exchange for a certain percentage of their future earnings, acting as a hedge against an injury or other hiccup in their careers.
Yet Fantex’s stock offerings have generated controversy. Investors will receive shares of securities such as “Fantex Series Arian Foster Convertible Tracking Stock.” The shares can be traded only on Fantex’s exchange, which it plans to set up soon.
The tracking stocks will theoretically benefit from the athletes’ future earnings, which include the value of playing contracts, corporate endorsements and appearance fees. If Davis’ future earnings potential soars, so will his shares, the thinking goes.
But investors have no actual interest in the earnings stream, just a virtual one. There is no guarantee of a dividend. And the stocks tied to the players can be dissolved at any time and converted into stock in the Fantex brand-management company.
“It’s a smart deal for the players, but when you look at the fine print, there are a lot risks on the investment side,” said Ronald J. Heller, a former tight end for the 49ers in the 1980s who now runs Peritus Asset Management in California.
“That said, NFL fans are a passionate bunch and there are probably a lot of 49ers and Houston fans that will want to play along,” Heller said.
For now, both the Davis and Foster deals are in their nascent stages. Investors can register with Fantex on its website, but it is not yet accepting orders for the IPOs. Cornell French, the co-founder and chief executive of Fantex, said that the company hoped to begin accepting orders for the Foster deal next week.
The company has not yet made a securities filing for the Davis deal, suggesting it is still several weeks away.
French said the company’s proposition had been well-received since its debut two weeks ago. “We will continue to be out in the marketplace signing athletes’ brands and executing our business plan,” he said.
The company was formed by a collection of executives across Silicon Valley, Wall Street and the sports worlds. French is a longtime technology entrepreneur and another founder, David M. Beirne, was a partner at the venture firm Benchmark Capital.
Fantex has had a number of early setbacks. The company had intended to open for business at the beginning of the NFL season, but Wall Street regulators held up the company’s debut. Then, three days after Fantex announced the Foster IPO, the running back had one of the worst outings in his five-year career, carrying the ball just four times for 11 yards before leaving the game in the first half with a pulled hamstring.
French said he was not concerned about Foster’s injury or his spotty performance this season. The company intends to raise money in a Foster IPO that would go toward paying Foster $10 million for a 20 percent interest in his future earnings.
“Injuries are a risk for any of the players in the NFL,” French said. “We’ll continue to develop his brand off the field, and the Texans can handle what he does on the field.”