The Exchange

Why Investing in Pro Athletes Is for Suckers

The Exchange

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What could possibly go wrong?

In investing (and in life) it’s the one question people never ask often enough.

Investors and sports fans have an intriguing new opportunity to cheer, thanks to Fantex, a startup that plans to offer public shares in professional athletes and other celebrities, as a way for members of the public to cash in on the future success of their favorite stars. The first POA (publicly owned athlete) will be Arian Foster, the charismatic Houston Texans’ running back who has become one of the NFL’s leading rushers as well as a prosperous pitchman for brands such as Under Armour and Kroger.

The scheme works like this: Fantex will raise $10.6 million from investors in a public offering of its own shares, and give $10 million to Foster, 27, while keeping the rest as the firm’s cut. The $10 million is Foster’s, no matter what. In exchange, Foster has signed a contract agreeing to pay Fantex 20% of his future earnings.

None of that money will go back to shareholders, but in theory, the more the running back pays to Fantex, the higher the firm’s stock will go, benefiting the investors who put up the original $10 million. As BusinessWeek points out, simple math dictates that the break-even point is $50 million in future earnings, with Foster coming out ahead if his earnings fall below that and Fantex winning if they’re higher. The risk of Foster getting injured or ending his career early for some other reason would be part of the gamble for shareholders.

What could possibly go wrong? Oh, only about a million things, but I’ll detail just a few of the more obvious ones.

The NFL could discourage or ban such deals. Why might it do that? Well, a third-party organization is creating a huge financial incentive for one of the league’s marquis players that doesn’t necessarily benefit the league. And where is the team owners’ cut, by the way? It’s worth keeping in mind that the NFL is run by owners, not players, and they don’t necessarily care whether a third-party deal is good for players. They do care a lot about the integrity of the league (in their eyes), however.

The whole scheme could draw negative publicity. Felix Salmon of Reuters argues that there’s something unsettling about investors, probably overwhelmingly white, buying shares in a black athlete. “Do you really want to buy shares in a company which treats young black men as property to be acquired?” he asks. What if the NAACP or other groups protest? What if there are boycotts? That would sorta take the fun out of it, wouldn’t it?

The list goes on. Regulators could get involved. There could be lawsuits if it appears Foster is deliberately underperforming, for any reason. Foster could fall on hard times (which been known to happen with rich young athletes) and end up paying shareholders 20% of a paltry income while getting evicted from his house. What is Fantex’s fiduciary responsibility if that happens? Continue to enforce its contract with Foster, no matter how heartless? Or cut him a break and invite a flood of shareholder lawsuits?

Fantex lists dozens of such risks in the prospectus it filed with the Securities and Exchange Commission. Then again, investing, like sports, is all about taking the right risk at the right time. And if you really like risk, this is the deal for you.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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