Hut, Hut, Hike! Investors Buying Stock In NFL Player Through First Fantex IPO

by Pepper Hamilton LLP
Contact

On April 28, 2014, shares of Fantex, Inc. (Fantex), which are linked to the performance and earnings of Vernon Davis, star tight end of the San Francisco 49ers, were sold to the public. Other professional football players for whom Fantex has filed initial public offering (IPO) registration statements include quarterback EJ Manuel of the Buffalo Bills and running back Arian Foster of the Houston Texans.

What is Fantex?

Fantex is an online securities exchange that is a member of the Securities Investor Protection Corporation (SIPC) and Financial Industry Regulatory Authority (FINRA).

How does Fantex Work?

Professional football players (and possibly in the future professional athletes of other sports and other celebrities) that want to be traded on Fantex are vetted through a typical IPO process. The process starts when Fantex files a registration statement with the U.S. Securities and Exchange Commission (SEC) detailing the information on the stock to be publicly offered, including information about the associated athlete and his or her playing contract and endorsements. Each athlete listed on Fantex will be identified by a different series of stock of Fantex. Once the review and comment period with the SEC is complete and the registration statement is declared effective, investors can buy such shares.

Investors do not purchase shares of the actual athlete. Rather, investors are purchasing “tracking” shares of Fantex that reflect the separate economic performance of a brand contract that Fantex has signed with the athlete. For example, subject to certain caveats, Fantex has entered into a brand contract with Vernon Davis whereby 10 percent of his salary, bonuses and other compensation received in connection with football, including endorsements, television appearances and speaking engagements, will be paid to Fantex. The brand agreement also covers other football-related income received by Davis, including income from coaching and broadcasting. Put more simply, the more money that Vernon Davis makes, the more money that Fantex makes, which in turn should drive up the price of the shares “tracking” Vernon Davis. Shares will not be listed on a more traditional stock exchange such as the NASDAQ Stock Market or the New York Stock Exchange. Instead, investors can buy and sell these shares with other willing investors only on Fantex’s new online exchange.

Why do Professional Athletes Agree to Remit 10 Percent of their Earnings?

A professional athlete, like Vernon Davis, that enters into a brand contract with Fantex receives the net proceeds from the IPO of the shares sold. There are no underwriting fees deducted from the net proceeds, as there would be in a conventional IPO. An athlete that lists on Fantex typically earns compensation based on the potential of his earnings and the valuation of potential earnings depends in part on the volatility and risk of the athlete’s earnings. The earnings of an NFL player are particularly volatile – many careers end prematurely, injuries are prevalent, competition for roster spots is intense, playing time is limited and highlight-level plays are even less common. A player might not receive any income if he fails to make the team or becomes unable to play. Moreover, many sports team contracts allow for modification by the team if it needs room under the league-mandated salary cap to pay more to another player. The amount of the compensation that may be earned is also based on the valuation of that athlete’s earning potential and the perceived value of that athlete’s “brand.”

Fantex assigned a present value for Vernon Davis’ future earnings of approximately $40 million. In exchange for Fantex receiving 10 percent of his future earnings, Vernon Davis will receive a lump sum of approximately $4 million, assuming the sale of all of the shares linked to his earnings. Of course, over time an athlete might make far more or far less than the assigned valuation, which provides the incentive for his “tracking” stock to trade. Events that enhance brand income should increase the stock price, such as a new contract or endorsement. Events that reduce brand income should decrease the stock price, such as an injury, being released from a team, a promising new star who might be perceived as possibly replacing Davis being drafted, or legal troubles.

      Pepper Points:

  • Fantex is part of a growing crowdfunding trend of the individual annuitizing his or her own revenues. Another company, pave.com, offers future payment streams of promising young professionals who agree to return a fixed percentage of their income over a shorter period, usually five years, in exchange for a lump-sum payment. This follows on the premise that investors might be better at valuing people than they are at valuing enterprises.
  • Athletes should retain legal counsel before considering to list on Fantex to ensure that their interests are adequately represented. As would be the case for any IPO issuer, counsel would review and negotiate the underlying brand contract and oversee the offering process as it wends its way through the SEC and then on to closing with the investors in order to help ensure that the process complies with the myriad technical laws and regulations involved.

In addition, it is in the interest of Fantex to see an athlete listed on their exchange make more than the athlete otherwise would. For example, Fantex plans to promote the brand of Vernon Davis after the IPO of the shares linked to him are declared effective by the SEC. This commitment can help an athlete earn more than he otherwise would have, had he not been listed on Fantex. Plus, the novelty of the Fantex IPO is marketing in itself.

For more information, please visit http://fantex.com/.

Written by:

Pepper Hamilton LLP
Contact
more
less

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!