In the common purchase of equity or debt in a company, the intelligent investor usually weighs possible risks against the potential gains. A higher risk in investment usually points towards a greater potential for gains. But what if the risk of an investment is based solely on future events that cannot be predicted by any formula or forward-thinking investment strategy? What if the future valuation of equity is based on something other than the direction in which a market may move or a particular sector may perform? This is exactly the case pertaining to a company’s cutting edge idea in “buying shares” in athletes. A company named Fantex announced a new business plan Oct. 16 in which investors would be able to buy and sell shares on an athlete stock exchange.
The first athlete to be traded on this platform will be Arian Foster, the running back for the Houston Texans. Fantex is offering 1,055,= shares in Foster, but how exactly is each share valued? The shares are called “Fantex Series Arian Foster Convertible Tracking Stock,” which will each have an initial public offering (IPO) of $10 per share. No single investor is allowed to purchase more than one percent of the total shares, or $105,000. The additional $550,000 capital raised pays for underwriters and other IPO expenses.
Foster will receive $10 million in proceeds from the distribution in these shares in exchange for 20 percent of all his future earnings from activities on and off the field. This process works much like insurance for Foster, who is in his fifth season in the NFL that is already 1.5 years past the average career of a running back. He is no longer only a running back, but he is in essence a “brand.” The more revenue he generates for himself, the more likely it is that the shareholders of Fantex’s Convertible Trading Stock will see a return on their investment. The purchasers of this stock do not own direct equity in Foster’s career, but they will receive dividends from Fantex based on his earnings and will also be able to trade the stocks on a platform that is linked to real cash flows associated with his performance.
The risk is that Foster could be injured at any time, in any game or practice, rendering it extremely difficult for him to generate future cash flows from performances or endorsements. Also, there is little guarantee that there will be prospective buyers for the shares owned.
“Investing in our Fantex Series Arian Foster should be considered only by persons who can afford the loss of their entire investment…This offering is highly speculative and the securities involve a high degree of risk,” Fantex said in its SEC filing.
One might think of it as playing fantasy football with a large amount of capital. This investment is not for everyone, but is certainly an opportunity to own a piece of exotic equity.
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