Invest-in-Player Opportunity: the Arian Foster IPO

Fantex, Inc. has filed paperwork with the SEC to register a securities offering based on future earnings of NFL star Arian Foster -- and Arian is selling.

Most of us can pick out our favorite examples over time of athletes finding alternative sources of income based on their stardom.  I still remember the first time that I heard Allen Iverson’s “40 Bars”, saw Shaq star as Kazaam, and more recently, read reports about Curt Schilling putting out every dollar and bloody sock he has into a video game obsession.  The latest venture making headlines, however, has to top them all in terms of creativity:  Houston Texans running back Arian Foster has elected to essentially have an initial public offering for himself, whereby investors buy shares in his future income and he collects the equity raised up front.  Whether or not this works out, I was thrilled just to read about it, and I expect no less from professional sports’ favorite philosopher since Bernie Parent.

Here’s the short of how it works, as documented in papers filed with the SEC by the issuer, Fantex, Inc.: “As of October 17, 2013, we have entered into a single brand contract with Arian Foster, a professional athlete in the National Football League, or NFL, pursuant to which we will acquire a minority interest equal to 20% of the gross monies or other consideration (including rights to make investments) that Arian Foster receives from and after February 28, 2013, subject to specified exceptions, as a result of his activities in the NFL and related fields (including activities in a non-NFL football league), such as broadcasting and coaching. As consideration for this interest under the brand contract, we will pay Arian Foster a one-time cash amount of $10.0 million contingent upon our ability to obtain financing, which we intend to do through this offering.”

For those of us in the realm of securities law, September was a big month. The release of the new SEC regulations, mandated by Congress’ JOBS Act, and the prospect of “crowdfunding” on the horizon marks a new era for investing.  With all respect due to Congress (none) and the SEC (limited), Fantex and Arian take the cake.

After going undrafted out of U. Tennessee, Foster has blossomed into one of the most recognizable personalities in the NFL. (Photo courtesy: personal collection of Arian Foster and his daughter Zeniah)

Fantex’s filed documents include a complete prospectus with financial statements and capitalization/distribution summaries.  The offering also sets forth a laundry list of investment risks such as physical injury or general decreased performance by Foster himself.  There are a number of interesting components to the filing, including the following: “If Arian Foster resigns from the NFL within two years of the date of this offering for any reason other than injury, illness or a medical condition, we [Fantex] may elect in our sole discretion to terminate the brand contract and he will be required to pay us approximately $10.5 million (net of any amounts previously paid to us by him pursuant to the brand contract).”

Despite its uniqueness, this is still a securities offering at its core, and is therefore still subject to state and federal regulation, hence the Registration Statement under the Securities Act of 1933.  As acknowledged in Fantex’s Form S-1:

* There is no current trading market for our Fantex Series Arian Foster or any other series of our capital stock and if a trading market does not develop, purchasers of our Fantex Series Arian Foster may not be able to sell, or may have difficulty selling, their shares.

* Our Fantex Series Arian Foster is not a “covered security,” or otherwise exempt from the “blue sky” securities laws governing sales and purchases of Fantex Series Arian Foster in each of the fifty states, and therefore we must register in each state in which offers and sales will be made.

*State securities laws may limit secondary trading, which may restrict the states in which and conditions under which you can sell shares of our Fantex Series Arian Foster.

Many of us are already invested in Arian Foster – whether through fantasy football among league managers, success of the Texans among their fans, or otherwise – so some view this as the next logical step, but admittedly a big one.  Many are excited, but he NFL has yet to issue a detailed comment.  Some might view this as an athlete betting on sports.  Despite being one of the greatest hitters of all time, most people remember Pete Rose more for betting on baseball.  Rose maintains that he only bet on his team winning, and he still is banned from the sport (FYI- MLB is still furious about Biff Tannen knowing the outcome of the next 25 World Series).  Could pro sports leagues or the player unions institute policies that specifically prohibit such an arrangement?  Could some argue that Foster now has less reason to try his hardest, in that he has essentially already capitalized on his future?  Can I short sell Foster stock if I also think that his best days are behind him and that the price will be inflated based on general market excitement?  Perhaps some of this was the impetus for the move by Foster — his league-leading touchdown production of the past few seasons has tapered this year, and the savvy fellow is just selling himself high in anticipation of declining performance, not to mention he left last Sunday’s game in the first quarter with an aggravated hamstring and did not return.

Then again, investors may take comfort in the idea that he plays for a team whose logo is a Bull, not a Bear.

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