As sports and stocks go, bad investments won’t necessarily scare off potential buyers. Thousands of Packers fans have purchased over the years stock in the team, despite clear disclaimers regarding the inability to sell the stock or to ever make any money from the transaction.
Ultimately, fans don’t care; they view owning a piece of the Packers as an extension of their devotion to the franchise, gladly paying for the privilege of hanging a stock certificate on the wall of the room that contains their other green-and-gold memorabilia.
Fantex is taking the idea a step farther, offering shares of stock in specific athletes who receive lump sums now in exchange for a percentage of certain types of future earnings, both on-field and off-field.
Texans running back Arian Foster became the first NFL player to accept a deal with Fantex, agreeing to surrender 20 percent of future football-related earnings in exchange for $10 million in cash. The offering was later “postponed” after Foster underwent season-ending back surgery.
49ers tight end Vernon Davis became the second player to agree to the deal, getting $4 million now while giving up 10 percent of his future earnings. Fantex announced Monday that the reservation period for the Vernon Davis IPO closes on Friday, April 25. Then, if enough reservations are made, Fantex will open on Monday, April 28, a trading platform where folks can buy and sell shares in Vernon Davis.
Whether the movie of choice is Trading Places or The Wolf of Wall Street, the message is the same. Investors potentially lose plenty of money via the buying and the selling. But Fantex makes its money either way, by creating the arena in which the shares are bought and sold and charging a fee or commission for the buying and the selling.
The difference here is that Vernon Davis, Inc. has a specific but currently unknown date on which he will go out of business, for all intents and purposes. And those investors (suckers) left holding the bag when Vernon Davis decides to quit playing pro football will see the value of Vernon Davis shares plummet immediately.
There’s a chance that Davis will find a way to make money in broadcasting or other football-related endeavors after his NFL career ends. But the money he receives (and in turn partially surrenders to Fantex) will be small in comparison to his football salary.
Will some investors make money? Sure, if they buy low and sell high. Will Fantex make money? Absolutely, on every transaction.
For Davis, it will look like a great deal when the $4 million check is cut. It possibly won’t look so good 10, 20, 30, and 40 years from now, as he’s dealing with the constant stress and administrative burden of surrendering 10 percent of every autograph signing or any other marginal football-related revenue stream he still has.
Then there’s the potential for litigation. If/when Fantex goes belly up and a lawyer representing a class action of Vernon Davis investors starts looking for assets to pursue, Davis will be at considerable financial risk.
As a result, we’ve yet to hear from anyone in the industry who thinks this is a good idea for the player or the investor. It’s definitely a good idea for Fantex, as long as it can find players who’ll take the money now without thinking through the potential long-term consequences — and as long as it can find investors willing to play Russian Roulette with their hard-earned American dollars.