Owning a Player: Fantex and the Arian Foster IPO

November 23, 2013

contract

By Kevin Robertson – Thompson Rivers University 3L JD Student

A vast number of people grow up dreaming about becoming professional athletes but few ever reach that level.Instead they are relegated to playing sports recreationally, cheering on their team, and participating in a fantasy league.In a fantasy league a person acts as a combination of owner, general manager, and coach in an effort to run their team better then their opponent.While pride may be one the line, oftentimes there is also money up for grabs.

In American football, due to the constant injuries and changing focus of teams (say from running to passing, or vice versa) it is often necessary for a person to add or drop players based on how a person believes they will perform in future games.In a sense, a person is stating their belief over how the player will perform in the future.Simply put, if a person believes that a player will do well then they will play them.Alternatively, if the person believes that the player will not do well then they will not use them. 

In this way, a fantasy football league is similar to how a person plays the stock market.Buy the stocks that you think are going to perform well and sell the stocks that you believe are going to do poorly.When you consider the dedication that people put into researching their choices the parallels become even more apparent.

However, things are about to change.Fantex is launching a new program whereby for $10 a person can buy a percentage of a player’s future earnings. The first player to sign on with Fantex for this program is NFL Texans running back Arian Foster.In exchange for giving Fantex a 20% share of his future football earnings he will receive $10 million USD.Fantex will then take the 20% share and divide it into one million shares, which will then be sold to investors through an Initial Public Offering (IPO).

As with all things of this nature, someone is going to lose money.It’s possible that Foster will go on to have a healthy career and thus earn those who own his stock a healthy profit but it is also possible that he gets injured in his next game and never plays again.

What is fascinating and will be a huge point of contention in the future is that the contract does not only include his NFL salary but also includes any related fields.In defining related fields the prospectus for the stock gives a few examples such as broadcasting and coaching.That being said, there are a lot of things that could fall into the grey area and possibly result in disputes.If Foster opened a sports bar, which was named after him, could that be considered a related field?What about if he was selling autographs?

As well, there are a couple of other things that could pose problems in the future.The contract does not expire so Foster will be giving 20% of football related income to Fantex for the rest of his life.While the freedom of people to enter into contracts on their own volition is well established, the shear length of the contract will likely bring up concerns.One issues is that Foster has in effect “sold his soul to the devil” for a one time monetary payment.The contract only ends if he pays back the full amount plus a penalty.He cannot get out of the contract without Fantex’s agreement.In this way, if he retires within 2 years of signing the contract for any reason other than injury, illness or medical condition Fantex can unilaterally cancel the contract and demand repayment of $10.5 million USD.

In Foster’s case his contract might only be for 20% of his future income but what would happen if it were for more?Say 50% or 100%?There is something morally wrong for a society that has moved past slavery to then allow a person to become indebted to another for life.

It is unclear whether college players will sign up with Fantex.While the NCAA has been adamant that they are not interested in paying the players for their services, it would be hard for a lot of the players to turn down a lump sum payment even if the terms were not favorable in the long run.

In fact, it would be possible for a college player to game the system in a certain situation.Taking Foster’s contract as an example, a college athlete could get a lump sum payment and then pay it back (along with the penalty) with a signing bonus if they make it into the league and get a large contract.A strategy such as this would be very smart if the player knew that they had an even larger endorsement deal coming in the near future.Once again, legally this would be a grey area in that Fantex is registering each player under the Securities and Exchange Commission, which has strict rules governing insider trading.As well, with college players there may be issues due to them being minors.

Like many things in sports, the IPO into Arian Foster will garner a lot of money for some people, even if it isn’t in the best interest of the game or society.

The prospectus for the IPO is available to read here and contains some very interesting information not only on his health but also his contracts with both the NFL and endorsement deals. 

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