While at first this question may seem more than a little “random,” recent newsÂ reports and commentaryÂ about the plans of an investment firm called Fantex BrokerageÂ ServicesÂ to offer shares in 20% of Houston Texans running back Arian Foster’s “future income,” have made it a subject of interest for everyone from sports fans to the SEC.
Creating this particular investment vehicle started out simply enough (Fantex paying Foster a straight sum of $10 million for the rights) but presents a host of complicated questionsÂ beginning withÂ the basic definition and legality of certain types of non-traditional securities (e.g., right now, assuming there is enough market interest, investing in FosterÂ seems likely toÂ be approved by the SEC – in part due to strict investment minimums and other types of protections written into the IPO documents – yet, only last year,Â investing in the outcome of political electionsÂ was expresslyÂ banned by the CFTC as a form of illegalÂ “gambling.”) Is there a contradiction?
Perhaps not. Fantex would probablyÂ point out thatÂ a majorÂ difference between their product and the banned election markets is that Foster investors are gaining access to a lifetime of opportunity unlike the political “investments” which were essentially pure win/lose propositions based solely on the outcome of a one time event. After all, David Bowie wasÂ a successful pioneer in this area with his legendary “Bowie Bonds,” although unlike theÂ Foster investment vehicle, Bowing Bond investments are essentially fixed income contracts based on royalties from an existing portfolio of songs. With “Foster shares,” in contrast, everything is based purely on future performance, making a Foster investment seem a lot more like equity – not to mention considerably more risky. A single injury on the playing field could wipe out one’s entire investment in seconds – and one can imagine lots of other scenarios pointing toward massive volatility. And let’s not forget about liquidity either – should things go south, will there even be a real market to which investors can turn?
These are some of the reasons why Fantex has been emphasizing that they are NOT, in fact, selling shares in Foster – They’re selling shares in a portion of Foster’s future income (some of which is guaranteed or at least highly likely)Â but which also goes well beyond salary to include advertising, endorsements AND even non-football related activities in which Foster may successfully engage later in life (He’sÂ a football player now but who knows? He just might invent the next Google . . . Or star in a movie . . . Or run for President . . . Weirder things have indeed happened.
And then there’s this observation noted in an recently published Grantland article:Â HowÂ exactly does oneÂ draw the line when it comes to material non-public information? Sports commentators and coaches frequently comment about the status of their players – including responding to reporters’ questions about past and present injuries. Does everyone associated with the Texans suddenly need to start exercising the same sort of caution normally reserved for executives at publicly traded corporations?Â Will there be “black out periods?” How will sports journalism be affected in the process? What aboutÂ conversations overheard at sports bars or up in the stands? And, moreover, what exactly is “material” in the context of an athlete’s future earnings potential anyway?
Clearly,Â something like knowledge about a health condition would appear to fit that description. But what happens when an employee of Doritos (a made up example) decides to short Foster because he finds out at an advertising meeting they’re likely to be using a different player to sell their chips? The employee doesn’t know for certain – and it’s not at all clear that the amount of money from aÂ single ad (relative to Foster’s overall FUTURE earnings) could rise to the level of true materiality. Also, it at least seems likely that many Fantex investors – simply due to the unique nature of what it means to be a sports fan – won’t always be making rational decisions anyway. If they like Foster (and love The Texans), they’ll still be putting their money down the same way people bet on favorite teams -Â odds be damnedÂ – every single day in Vegas.
In theory, I tend to think many of these potential pitfalls can be worked out and generally believe people who want to make risky investments – or even gamble, for that matter – ought to be able to do so as long they’re operating on a proverbial “fair playing field” (even walking into a casino, you’d have to be moron not to know who really “holds the cards”). Moreover, if Foster or other playersÂ do decide itsÂ worth negotiating to receive a portion of their earnings upfront, and are actuallyÂ able to find a willing buyer, their fundamental “right to sell” seems – well – pretty much like basic capitalism. It’s actually even probably sensible when one considers the age constraints and injury risks associated with a sport like football. Regardless, we’re certainly not talking about anything that even remotely approaches contraband here.
So are these investments aÂ wiseÂ choice? I’ll leave that one unanswered . . . Here’s the Grantland piece (btw – Kudos on the creative title):