Vernon Davis Stock Offering by Fantex–Bust or Boom?

Vernon Davis Stock Offering by Fantex–Bust or Boom?
Is the New Concept of Buying Stock in an Athlete the New Fad or is it a Legitimate Investment Tool?

What is Fantex?

Fantex, Inc. is a company that specializes in purchasing a minority percentage of an athlete’s brand which is his future on and off the field earnings. They divide that value into shares and then sell those shares as an Initial Public Offering(IPO). According to Fantex Inc, this is the first time a person can buy a piece of an athlete’s projected future earnings including endorsements, professional contracts and appearance fees. Fantex claims that a superstar athlete earnings could last forever based on their earning potential on and off the field even past their natural death.

First IPO

Last year, they attempted this investment type of IPO with Arians Foster, the running back for the Houston Texans in the National Football League but had to postpone because of season ending injury. Fantex, on April 28 2014, did in fact issue and complete their first IPO on Vernon Davis, tight end for the San Francisco 49ers. They offered 421,000 shares at $10 each and reported that they sold every share raising $4.2 million. The daily closing price on their proprietary trading exchange showed the price rising by 20% to $12 a share according to San Francisco Business Times reporter Eric Young. $4 million will be paid to Vernon Davis upfront for 10% of his future brand. The balance will go to the underwriters, Fantex, Inc. for expenses and profit. Pretty simple concept but “Highly Speculative” as admitted to by Fantex themselves in their press release as reported by Market Watch.

Novelty or Investment?

Any new frontier will have its risk. All investments come with a degree of risk and others have a gigantic “Stop Sign” painted boldly on their face. Which is this, novelty of money maker? I will leave you to digest the facts, do your due diligence and make that decision for yourself.

Fantex Fact-referenced directly from Fantex

• Fantex is the proprietary owner of the exchange where these shares will be traded.
• 95% of the tracking stock will go to the brand athlete upfront and 5% to expenses as well as “specified expenses related to other tracking stock that may be issued in the future.”
• Holders of shares will have no direct investment in the business or assets of the brand, associated brand or the athlete.
• The investment in the tracking stock will represent an ownership interest in Fantex Inc.

Fantex Summary of Risks–referenced directly from Fantex Risk page

• Fantex, Inc. has incurred significant losses since its inception and anticipates that it will continue to incur losses in the future.
• Fantex, Inc. has a very limited operating history.
• To date, Fantex, Inc. has not generated any revenues or cash flow from any brand contract.
• Fantex, Inc. will need to obtain additional funding to acquire additional brands and it may also need additional funding to continue operations
• Fantex, Inc.’s Brand Contracts and its Business Risk –referenced directly from Fantex Risk page
• Fantex, Inc.’s principal source of cash flow for the foreseeable future will be derived from its brand contracts.
• Fantex, Inc. does not have any experience managing brand contracts and it does not have any historical performance data about its brand contracts.
• Fantex, Inc.’s cash flows under its brand contracts will depend upon the continued satisfactory performance of the related contract party, and it does not have any rights to require the contract party to take any actions to attract or maintain or otherwise generate brand income.
• The leagues, team owners, players associations, endorsement partners, elected officials or others may take actions that could restrict Fantex, Inc.’s ability or make it more costly for us to enter into future brand contracts.

Offerings and the Offering Process Risks-referenced directly from Fantex Risk page

• There is no current trading market for any Fantex Inc. tracking series or any other series of Fantex, Inc.’s capital stock and if a trading market does not develop, purchasers of a Fantex, Inc.’s tracking series may not be able to sell, or may have difficulty selling, their shares.
• State securities laws may limit secondary trading, which may restrict the states in which and conditions under which an investor can sell shares of a Fantex Inc., tracking series.
• Fantex, Inc. intends to issue additional tracking series, which would reduce then-existing investors’ percentage of ownership in Fantex and may dilute Fantex, Inc.’s share value.

Summary and Talking Points

This novel approach has many expected pitfalls. From the company’s own admission, they operate at a loss and projecting continued losses into the future as well as being cash flow dependent on brand contracts. Admits to being a new company with little track record of successful past or current performance and no experience managing brand contracts. Doesn’t have the approval of the leagues or player’s associations. Unsure if future action could be taken against them where inception of future brand contracts would become cost prohibitive. This would negatively and mortally impact Fantex’s business model since their primary cash flow is dependent on the success of their brand contracts. State security laws may also limit people from selling shares because of where they reside, which would impact trading fluidity. Additional planned IPOs will reduce the current percentage of ownership in Fantex per share. So the more times they issue IPOs, the preceding shares have less value because of a larger outstanding share pool. Fantex also has zero control over the athlete. The value of Fantex is directly tied to the public persona of the athlete as well as that athlete’s future performance so if an athlete gets injured and can’t play again, in most cases that athlete value will plummet. The value of Fantex and the share prices across all brand contracts have to be impacted negatively as this decrease in a brand contract due to injury or arrest will parallel Fantex’s bottom line since this is really an investment in a company using the athlete as the investment carrot. So, If one goes kaput, all go kaput. Scary place putting all eggs in one basket and one of the few rules of investing 101 “not to do’s.”
Good or Bad

In my opinion, this is a novelty item, owning a piece of an athlete, like fantasy sports but using real dollars and maybe a projected payoff if an athlete becomes the next “Michael Jordan” with an amazing ability to generate income after his days on the court. But for 99% of the athletes, this will not be the case. If my mother asked me about this “investment”, I would tell her to pass. If my brother asked me, I would tell him, buy a few shares for the fun of it but don’t put the kid’s college fund in it expecting to get rich. Invest with the clear understanding that you will probably lose it all. Maybe Fantex could issue stock certificates, could be cool if they got an athlete to sign it. It would be neat to frame and hang in the man-cave and a true conversation piece. Perfect for the sports memorabilia collector but not a serious investor. Buy Disney, much less risk and more upside. If you decide venture into this investment, please consult a financial advisor or attorney prior unless it is for entertainment purposes only.