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Athlete IPO Tests Limits of Investing Morality

Athlete IPO Tests Limits of Investing Morality

In certain states NFL fans can place legal wagers on the outcome of a game. In every office in America there are fantasy football leagues in which players are traded, started or benched as their fantasy owner sees fit. The only way to move closer to trading based on an individual player's performance would be to directly own a stake in that player's future income stream.

Enter Fantex, a new company that lets investors buy "shares" in an athlete's future earnings. It's no fantasy. Fantex is planning to take Houston Texans running back Arian Foster public in the next few weeks.

In the attached video Buck French, co-founder and CEO of Fantex, explains how it works. "We signed a brand contract with Arian Foster to acquire 20% of his future brand income in exchange for $10 million. So in order to fund the contract, we have created a... Fantex Inc. tracking stock that's linked to the value and performance of his brand."

It's worth a moment of your time to scroll back up and read that paragraph again. Arian Foster is going to get $10 million in exchange for 20% of the money he makes for being Arian Foster for the rest of his life. Investors will then be able to buy and sell actual portions of Foster's income stream — forever.

Normally these type of "exotic" investments would only be open to accredited individuals (rich people). Thanks to the JOBS Act and crowdfunding, companies like Fantex are now fair game for anyone with a Social Security number, a mailing address and seed money. Of course, that doesn't mean you should necessarily invest in Fantex or anything like it. It just means that you can if you want to.

High Risk... High Reward?

As an actual investment, buying a share of anyone's future income via Fantex is a long shot. For investors to make money, Foster's share price would need to rise on the Fantex-controlled exchange. Assuming the exchange works and has sufficient trading liquidity to allow a shareholder to sell their stake and cash out their gains, it will work just like trading a normal stock.

The risks are laid out in the disclaimer and, it goes without saying, there is a lot of risk that comes with buying a portion of Foster's future earnings that aren't necessarily connected to his career.

If we stopped right there, buying shares of Foster would be a high-risk investment, but being a running back in the NFL is also a high-risk profession. Foster is currently nursing an injured hamstring and he hasn't even gone public yet. As French makes very clear, "If he doesn't play again, obviously that will affect the value of the brand."

The Murky Cross Currents...

Beyond the extremely high-risk nature of any start-up investment, Fantex raises some unique moral and ethical questions. High on the list is the idea of buying a portion of a human being's income for life.

French insists you're not technically buying or selling a human being. While that's true, there's a fine line.

Growing up, Foster knew he wanted to be an NFL player. In his prospectus video he states, "There was no plan B." He went undrafted and appears to have experienced enormous personal growth. He seems like an amazing individual with a whole alphabet of plans beyond just being "Arian Foster: Running Back."

Which is part of the problem. Foster the running back is nursing a sore hamstring. He's about to get $10 million in exchange for 20% of the income he generates for the rest of his life related to being a celebrity running back.

What if Arian Foster the human being doesn't want or need to incur the physical risk associated with being a running back in the NFL? There is absolutely nothing to suggest that Foster would be the type of person who would take the $10 million and pull a Ricky Williams, dropping off the grid and leaving investors out to dry. Certainly not over a sore hamstring.

The ethical questions surrounding Fantex have nothing to do with Foster the individual, and that's part of the problem. To succeed, Fantex will need to sign dozens of athletes. In fact, to work as an investment and make the Foster market liquid, Fantex will need to have enough athletes and entertainers with high-risk professions. All of them will have $10 million guaranteed and no reason to ram their heads into 270lb human beings until they can't remember their own names.

As a family member of these Fantex players, would you let them go within 100-yards of a football field after incurring two or three concussions just because it was their fiduciary responsibility to their Fantex shareholders? Absolutely not. On the other hand, if you don't care about these players as anything other than a stock, you'd send them on the field until long after they'd turn their knee joints into gravel and their heads into mush.

These are athletes who make their real money while they play. For every Terry Bradshaw raking in millions in broadcasting, there are 10 guys making not much of anything. If a Fantex athlete ends up signing autographs at used car dealerships for $50 when he's 50, his Fantex shareholders are entitled to $10.

If you're a shareholder, you want your athletes — your shares — to play until they are dragged off the field. To be an effective investor in this type of market you almost, by definition, can't care about the players as people. To invest in anything successfully you can't be emotionally attached in any way. Once you're buying the earnings power of players' brands, your primary economic concern is their playing contract. Their personal safety isn't just a secondary concern, it's not a concern at all.

Foster's prospectus video makes him seem like a genuinely good guy — I wish him all the very best. That's why I wouldn't want to own a tracking stock tied to the revenue stream of his brand.

Other Possible Conflicts of Interest

There are other questions raised by Fantex as a concept. John Elway is on the board. Is that a conflict of interest? Will Fantex give investors access to injury or personal information other NFL fans wouldn't have? Since other players and coaches can invest in players, does that in any way skew their judgement toward their jobs?

I ask French most of the questions in the video and, to his credit, he answers them frankly.

It's in an intriguing concept, if only as a conversation starter. As an investment, it's not for me — too high risk even without the morality questions. Thanks to the JOBS Act, you can take a look and make your own decision.

Would you consider investing in a pro athlete? Let us know your thoughts in the comment section below or visit us on Facebook!

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