The decision of Texans running back Arian Foster to trade 20 percent of all future NFL-related earnings for $10 million now continues to raise eyebrows around the NFL.
If the league office has concerns about the situation, however, it’s not saying anything. The NFL had no comment regarding the new business model that reportedly will be rounding up more pro football players. Broncos executive V.P. of football operations John Elway is a member of the parent company of Fantex, which is offering stock based on its “brand contract” with Foster.
But Fantex realizes that the NFL and other sports leagues could eventually take action. The Form S-1 filed with the SEC on Thursday by Fantex has this warning for potential investors: “Our business model depends on the cooperation of various third parties. Because the brand contracts and offerings of tracking series linked to the income of professional athletes and entertainers is a novel business model, there may be influential parties with interests that are adverse or perceived to be adverse to our business, such as sports leagues, sports teams, fantasy sports networks or gambling institutions. These parties may seek to change the rules, policies, laws, regulations or legal interpretations in ways to prohibit, or limit the success of, our business.”
The Form S-1 explains that an unrelated effort in 2010 to launch the “Hollywood Stock Exchange” for the trading of box office futures was blocked after the Motion Picture Association of America lobbied Congress to pass a law making the effort illegal.
The 148-page document contains plenty of other disclaimers and warnings regarding the risks of buying stock in the future earnings of a 27-year-old running back who clearly has concerns about whether he’ll make more than $10 million over the balance of his career. Otherwise, he wouldn’t be willing to give up $2 million of his next $10 million — and 20 percent of anything more than that.
The Form S-1 purports to calculate at pages 105 and 106 the average career for an NFL running back who has met specific criteria that Foster already has achieved: “a running back in the modern era (which we define as a running back who has retired from the NFL during the 15-year period between 1997 and 2011), who was the featured back on their team, selected to at least one Pro Bowl and rushed for at least 1,000 yards in at least three of their first four full seasons in which the running back played at least 13 games.” The average, under those factors, is 10.5 years.
The Form S-1 also explains that, if Arian Foster retires before October 17, 2015, he’ll be required to pay back $10.5 million, minus any money paid to Fantex over the next two years. Which means that he can retire at any point after October 17, 2015 and keep all the money.
The document also explains that, if not enough people buy stock in the “brand contract” with Arian Foster, the plug may be pulled on the deal.
To the extent that folks believe they’re buying stock in Arian Foster, in the same way folks have bought stock in the Green Bay Packers, that’s not technically accurate. It’s Fantex stock, with performance and perceived value tied directly to the amount of money Arian Foster pays back to Fantex over the balance of his career.
Still, people will think they’re buying stock in Foster. And Fantex will make its money from the commissions on all sales and purchases of the stock, Duke & Duke style.
If may sound like Fantex is a bookie (as Billy Ray Valentine surmised about the Dukes), but a bookie carries risk. Once the $10 million is raised, the risk passes to the investors, and the revenue comes from investor efforts to buy low and sell high and, ultimately, to ditch a stock that is destined to be worthless.
That’s the biggest problem with this model. These aren’t blue-chip, long-term, sustainable investments, especially for a running back who has plenty of wear and tear and who has made plenty of money already and who apparently is thinking about his exit strategy. Eventually, Foster’s football-related income will be nothing, or something fairly close to it.
While some players will retire and become coaches or broadcasters, how many of them really thrive in those professions? The funnel is tight, and only a small percentage of former NFL players earn significant dollars (in comparison to their NFL earnings) after retiring.
The process becomes a bit more intriguing if/when Fantex strikes a deal with Jadeveon Clowney, Teddy Bridgewater, or Marcus Mariota. For young players, the game will be to get in early, hope the player becomes a star, and get out at the right time, foisting the shares onto a sucker who gets sufficiently caught up in the hype associated with the player that it’s not simply enough to buy his jersey.
In our view, Fantex isn’t a bookie. They’re the architects of a series of convoluted (and for now legal) Ponzi schemes in which the purchasers of the IPO for each athlete hope to dump the shares at an increased value onto some sucker who either thinks that the number will keep going up — or who doesn’t care.
For that reason, there’s a strong belief in league circles that this experiment will fail. The fact that Elway is involved (as confirmed at page 130 of the Form S-1) makes us wonder whether it won’t.