EJ-Manuel

For those who thought Fantex Brokerage Services was joking when it set out to turn celebrity athletes into investible stocks, the second “person-IPO” in under a month should make clear that’s not the case.

The historic moment came on April 28 when shares of “Fantex Vernon Davis” began trading, linking a stock to the future income of the San Francisco 49ers tight end. The company sold 421,100 shares of the “convertible trading stock” at a price of $10 in this inaugural offering. The stock is currently trading at $10.50, down 4.55 percent on the day.

Investors in the Davis stock are entitled to “interest equal to 10 percent of the gross monies or other consideration (including rights to make investments) that Vernon Davis receives from and after October 30, 2013,” subject to exceptions and other legalese. Vernon, on the other hand, gets a one-time payment of $4 million in exchange for sacrificing a portion of his lifetime earnings.

Lest this initial offering be written off as a fluke, the company has already begun taking reservations for its second person-IPO, this time linked to the brand performance of Buffalo Bills quarterback EJ Manuel. The company will look to sell 523,700 shares this time around at a price of $10, implying a slightly higher valuation for Manuel’s brand than Davis’. Investors get the same 10 percent interest in Manuel’s future income, for which he will be paid $4.98 million.

Fantex has a third IPO in the pipeline with Houston Texans running back Arian Foster, who is apparently the most valuable of the three such athlete brands. Foster is also giving up the largest percentage of his future income. Fantex plans to sell some 1,055,000 shares in its Foster-linked offering in exchange for rights to 20 percent of the young star’s future income. Foster will receive a one-time $10 million payout in exchange. Unfortunately, Foster is currently injured, meaning his IPO is on hold indefinitely, pending additional insight into his long term health.

So all this leads to a number of questions, not the least of which are, is this ethical and is it a sound investment?

Unsurprisingly, Fantex would answer yes to both inquiries. On the former, Fantex co-founder and CEO Buck French looks at this as little more than a business transaction.

“These athletes are, in essence, CEOs of a multi-million company,” French says. In that sense, it’s not unreasonable to sell a portion of such company to investors in exchange for capital that can be put to work today. In other words, however unseemly it may appear, it’s just a matter of perspective.

As for the wisdom of buying a stock linked to the future performance of an athlete’s brand, French and his team believe this is where they can offer the most value. Part of the promise of the Fantex platform is that the company will work to build and market each athlete’s off the field (or court) brand.

It’s an interesting theory. By creating thousands of shareholders in each athlete’s brand, is Fantex in effect creating as many brand advocates? And can those advocates be leveraged through social media and other tools to make the brand more valuable? It’s an experiment we’re about to see play out. Fantex takes a sports marketing approach to its role in each athlete’s lives.

“We look at each brand as a unique startup – we can’t help Vernon on the field, but we can help him off of it,” French says.

Traditional sports marketing is built on sport, position, performance, French adds. Fantex aims to broaden the scope of that message by highlighting the broader and more sustainable attributes like athletes’ philanthropic and artistic endeavors.

Prior to the Davis offering, Fantex did a 13 city roadshow in the luxury coach cruiser formerly belonging to famed broadcaster (and before that coach) John Madden. The goal was to raise awareness and interest in the offering.

“The question we got from everyone was the same: ‘How do I make money?’” French say. “People aren’t doing this for affinity reasons.”

In other words, this offering isn’t (entirely) about fandom or about owning a piece of your team’s star player. Rather it’s about finding an alternative investment opportunity that, according to French, is not correlated to the economy.

“There are people who feel like they can understand this better than GE or IBM,” French says.

But is it really possible to value an athlete’s future income or to assess the risk in such an offering? Fantex relies on detailed statistical regression models to predict career length and to evaluate the possibility of both catastrophic and wear-and-tear injuries. The company then insures each offering against this risk.

The company looks at similar data in its decision around pricing each offering. Essentially, investors are purchasing the rights to future cashflow streams. Fantex therefore must apply a discount rate that communicates the value of that future cashflow today, at the time of investment, while considering the associated risks. Crucially, according to French, these valuation calculations are completed without considering the impact of its own “brand building” efforts.

It’s only been a few weeks since the Davis IPO and Fantex has yet to enter the market with its second such offering. But everything is going according to plan thus far. The Davis stock remains up from its offering price and the season hasn’t even started yet. The question is, how sustainable will this enthusiasm be and how much demand is there in the market for subsequent offerings?

The one thing that’s abundantly clear is the we’re not in Kansas anymore. The athlete as as corporation construct has gone from a metaphorical one to one rooted in a multi-million investment offering. It may be years before we know the implications of such a shift, be they financial windfall, financial ruin, or some other third, unconsidered outcome.

In the meantime, Fantex is getting ready to ring that IPO bell once again.

[Image via Athlete Promotions]