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Bob Levey/Getty Images Arian Foster #23 of the Houston Texans

Jocks and Bonds

Does the Arian Foster IPO really give fans a chance to buy a piece of an NFL superstar?

Arian Foster’s hamstring is his Achilles’ heel. You could assign it part of the blame for what happened in the spring of 2009, when zero teams bothered to take the University of Tennessee philosophy major (and the school’s second-all-time leading rusher) in the NFL draft after an uninspiring senior season made worse by a pre-combine injury.

Things flared up again two years later when Foster — who had signed with the Texans as a free agent and soon ascended to “poetry-writing Pro Bowl running back with chip on shoulder and heart of gold” status — posted an MRI picture of the ailing muscle on his open book of a Twitter account and caused the football community to briefly lose its mind.

Earlier this month, just days after it was announced that a San Francisco start-up called Fantex had filed documents with financial regulators that would supposedly enable it to offer shares of Arian Foster in an initial public offering, there was that damn hammy once more. It slowed Foster against the Kansas City Chiefs, then sidelined him after the first quarter. (Foster, who recorded just four carries for 11 yards against the Chiefs, didn’t practice Monday.)

This was not exactly the marketing fanfare that those involved in the curious financial transaction had been hoping for. But venture capitalists are excellent at appearing unruffled in times of significant uncertainty.

“He’s gonna rest it up,” Cornell “Buck” French, the cofounder and CEO of Fantex, said last week. “And I’m sure —”

He paused, as if remembering that we were on a phone call being recorded and transcribed for the SEC. These days, as Fantex seeks to raise just over $10 million for Foster — most of the proceeds would be handed over to the running back in exchange for an ongoing 20 percent cut of his future earnings — this sort of idle small talk about the three-time Pro Bowler could be construed as material nonpublic information.

“Well, I can’t comment on what I think,” he said. “It’s up to the Texans and their training staff and him. But my understanding is, I think he was classified as day-to-day, which basically means if he had to go he’d go. But we’ll see.”

We all knew we didn’t like it when Detroit Red Wings senior VP Jim Devellano used a metaphor to describe last year’s NHL lockout that referred to the players as “cattle.”1 And yet, turn on sports radio or go online during the course of a season — particularly around draft day or the trade deadline — and you’ll hear language that’s really not too dissimilar. Athletes become “assets” — or “rentals,” if you have an expiring contract — while teams turn into “buyers” or “sellers.” A proud GM who made smart moves, whether through free agency or the draft, might be congratulated on his excellent “crop” or “haul.” I’ve used all these terms myself.

For a population that loves its sports so very much, we’ve never been too good at figuring out exactly how to regard and consider our athletes. Are they entertainers? Ambassadors? Long-term creditors? Robots? Role models? We hate it when they are boring and we freak out when they’re brash. We have strong opinions about them, we play video games as them, we wear jerseys made to look like they belong to them, yet rarely do we try to understand them.

What does it mean, then, to be able to buy a piece of an athlete like Arian Foster? Is it the logical (if creepy) extension of our fantasy-mad land, the kind of environment that has Brandon Jacobs getting death threats, disgruntled fans showing up at Matt Schaub’s home, and random schmucks weighing in on whether Adrian Peterson should play football after the death of his 2-year-old son? Is it one more uncomfortable example of what William Rhoden wrote about in his book Forty Million Dollar Slaves? Is it a lark to be funded with the dough you’d otherwise throw away betting at Bovada? Or is it just an intriguing financial transaction, no different from buying a few shares of any young business and crossing your fingers?

Has something like this ever been done before?

Kind of, though the person in question wasn’t exactly an NFL running back.

As financier David Pullman remembers it, David Bowie was a fantastic client.

“He was very supportive,” Pullman said. “I didn’t know if I could do it, and I thought I could do it, but he was a great person to work with because he wasn’t calling every day like ‘Is this gonna happen?'”

It was 1997, and Bowie didn’t want to sell his catalogue of music, a bleak path taken by so many of his peers. But mounting expenses and breakups with both his wife and his manager left him unsure of what to do next.

“He realized his songs were his babies and he didn’t want to sell them,” said Pullman, who was a 34-year-old senior vice-president at a brokerage firm at the time. “And then I came up with the idea that we could securitize them. And they said, ‘What’s securitization?’ “

The $55 million deal Pullman structured was the first of its kind, took months to arrange, and got investment-grade ratings from the bond agencies.2 The buyer of the so-called “Bowie bonds” would receive, for 10 years, coupon payments backed by the royalty and licensing streams of the songs on Bowie’s first 25 albums. (“They were all gold,” Pullman said. “Platinum didn’t even exist yet.”) Bowie would get the upfront cash from the issue3 — and ultimately retain the rights to his music.

In the wake of the successful offering — Prudential Insurance bought up the whole thing, lest you were imagining Bowie bonds tucked inside every Ziggy Stardust album — Pullman began working with other artists. These included James Brown and songwriter groups like Holland-Dozier-Holland, who penned lasting hits like “Baby Love” and “Where Did Our Love Go.”4 He remains in the royalty securitization business today, though he now keeps the deals for his own inventory rather than trying to sell them to third parties.

The Pullman bonds worked because they were fixed-income vehicles backed by an established portfolio of songs that generated mostly reliable, known cash flows. But not every experiment in the realm of outright “human capital” investing has gone quite as smoothly.

Based on work done by economists Milton Friedman and James Tobin, Yale University launched a program in the 1970s called the Tuition Postponement Option. Students who opted in could take out student loans repayable by a small percentage of their future income: 0.04 percent for every thousand bucks they borrowed. But the plan faltered; 30 years later, angry graduates were still writing checks and giving interviews to The Wall Street Journal in which they described their situation as “like getting a case of herpes … it won’t kill you, but it doesn’t make you feel good about the person who gave it to you.” A company launched in 2000 called My Rich Uncle again sought to give out student loans repayable by future income streams, but by 2006 it had moved into the more traditional lending space and by 2009 it was bankrupt.5

Structurally, the Arian Foster offering has more in common with these equity-like plans than it does with Bowie bonds, which were built around songs that already existed rather than the potential of new music to come.

“It’s always hit songs that are recognized and iconic and known around the world,” Pullman said. “Billboard hits that are recognizable and continue to earn, as opposed to something that was a hit and is gonna disappear. Like, we wouldn’t do something that is new, no matter how big the song is. Because it’s only gonna go down.”

It’s hard not to think about the way in which Foster fits that latter description. He’s undeniably a current smash hit: next-level at football, intriguing off the field, magnetic, memorable, 27 years old, a vegan except (as with most vegans I’ve known) when he’s not. The people at Fantex constantly refer to him as a “trailblazer.”

Until he stopped using Twitter in March, his was a fascinating and must-follow account. He recently told Health Warrior, a company that makes chia bars, that he was more interested in investing in the company than in getting paid to be its spokesman. Dig into the Fantex SEC filing and you’ll find references to Foster’s music, his children’s books — both are actually excluded from the income streams to which Fantex will have access6 — and a Kevin Costner movie in which he starred. His website includes a “Musings” tab that features poetry like this, called “Untitled”:

This moon bleeds light, atop a dream filled land,
but most sleep amidst the sun, that’s how dreams kill man.

He was the third-fastest NFL player to rush for 5,000 yards. Everybody wanted at him in fantasy football, and now everybody grumbles that he’s not having the monster year they’d been banking on. When his contract is up in 2017 he’ll be 30, which means you have to believe one of two things: Either he’ll have slowed down big time or he’ll be quite a force indeed. (If it’s the latter, he’d be in rare company: Nearly all starting running backs in the NFL are in their twenties.)

And now this, the hamstring.

“Yes, I was watching the game,” said French. “Did I want him to get hurt? Of course not. I don’t want anyone to get hurt at the end of the day. When he went back to the locker room and we didn’t know what was happening, of course — I’ve gotten to know him well, and he’s a good human being, and we just announced [his IPO] on Thursday, so of course you’re like, Oh, great, I can only imagine what’s gonna be said.

Plenty already had been said about Fantex even before Foster’s injury. Reuters’s Felix Salmon called all potential investors “chumps.” One Houston finance professor told Time that the whole thing has “a penny stock feel to it.” New York Magazine’s Kevin Roose wrote a piece headlined “The Age of Bullshit Investments Is Back!”

That’s because, when you look closer at the company’s SEC filing, you start to realize that at its root this isn’t really about Arian Foster, nor is it a more high-stakes version of fantasy football exactly. Buying a slice of the running back at the $10 IPO price does not give you any more ownership than buying his jersey would. (There are currently no plans, for example, for Foster to meet with investors or appear on quarterly earnings calls, and shareholders won’t have any voting rights.)

What it does get you is one share of a “Fantex Series Arian Foster Convertible Tracking Stock” that theoretically will benefit from his future earnings stream. Except that any actual distributions are at the discretion of Fantex, which will also take a 5 percent cut. If you want to buy or sell shares, you need to do so on Fantex’s proprietary exchange, for a brokerage commission. The stock that you own can be abruptly converted, at any time, into basic company stock. (And, again, at the discretion of Fantex.) I’d love to listen in on the customer service calls on the day that a bunch of Houston-area oil men with cash to burn wake up to find out that they’re now proud minority shareholders of an unlisted Silicon Valley venture capital–backed marketing firm.

The entrepreneur is easy to recognize when encountered,” wrote Randall Stross in his 2000 book eBoys: The True Story of the Six Tall Men Who Backed eBay, Webvan, and Other Billion-Dollar Start-Ups.7 “This is the person who is afflicted by a monomaniacal fever, who cannot not be an entrepreneur.”

When you think about it, many entrepreneurs share a number of similarities with professional athletes (and not just a predilection for hoodies or the phrase “at the end of the day”). A breakout success early in life — say, spending $6.7 million on a stake in eBay that would be valued at $5 billion two years later, or having a 1,600-plus-yard rushing season at age 24 — can be the platform that launches a career. But it can also become, for better or worse, the only thing that defines you. For every hit, there are multiple soul-crushing misses. Hard work and luck have a chicken-and-egg relationship, and the distinction between being the best and just being the best-positioned is often hard to spot.

You have to be nimble, to adapt to the arena you’re in and the rules governing play. For example, a recent loosening of financial restrictions known as the JOBS Act now allows companies defined as “emerging growth” much more regulatory wiggle room as they get off the ground. Among other things, an upstart like Fantex can market itself to investors more broadly and with less underlying information than the SEC required in the past.

There’s a scene in eBoys in which Beirne’s colleagues at Benchmark talk about the reaction of Meg Whitman’s husband to the idea of his wife helming eBay.

“What did her husband object to?” asked Andy Rachleff.

“I think he thought it could be a faddish kind of thing. Here’s an interesting statistic for you. They did two million dollars in Beanie Babies in December!” Kagle laughed. “Which, in one point of time, is really exciting” — and, continuing to laugh but with a nervous hiccup — “and another point in time, pretty scary! He was concerned that we might have something here that is sort of a classic consumer cycle.”

“Is he qualified to understand?” Harvey asked. Kagle and Rachleff answered simultaneously: “He’s a brain surgeon!” Yes, he was probably smart enough to take this in.

As the laughter subsided, Rachleff asked, “But does he have it in perspective?”

It’s a funny image — you imagine it looking something like this — but it illustrates a real concern when it comes to these sorts of investments. There are some protections built into the Fantex offering — investors with less than $50,000 in annual gross income or net worth will be limited to a $2,500 maximum investment — but by and large, the IPO seems designed to target the opposite of sophisticated institutional investors who “have it in perspective.” It’s set up for average fans in almost the same way a pro sporting event might be — to draw them in, get them to buy a ticket to the game, and then watch the marked-up soft drink and shirsey sales roll in.

First, though, they have to raise the money. If the 1,055,000 Fantex Series Arian Foster Convertible Tracking Stock shares aren’t all spoken for, the Arian Foster IPO will not take place. And if they are? He’ll be the business model’s first test case — which, it should be pointed out, aligns quite nicely with the “trailblazer” image that is part of the personal brand profile Fantex has developed for him. If it works out, the company hopes to offer similar IPOs for other athletes as well as musicians and actors.

Comparisons have been made between Fantex and a company like Protrade, which allowed users to buy and sell virtual athlete stocks8 and was founded by Michael Kerns, now a senior vice president at Yahoo, and Jeff Ma, one of the MIT students whose card-counting Vegas escapades were featured in Bringing Down the House.

But when you read this 2007 Michael Lewis article about the company, you can see a key difference — namely, that Protrade was actually about the sports. Kerns used terms like “quantify the value of an assist that leads to a dunk,” but phrases out of Fantex focus more on “core brand attributes” and actually seem to play down the NFL aspect. When French did bring up Foster’s pro football career in our conversation, it was almost entirely in the context of brand exposure. When I asked if he related with athletes at all as a self-made person himself, he said he identified with “the building component of it.” (His answer also included the phrases “leverage that platform,” “shape a brand,” and “at the end of the day.”)9

While Fantex’s 20 percent cut of the remainder of Foster’s existing NFL contract only makes up a fraction of his IPO price, many of his endorsement deals, Under Armour among them, are due to expire in 2014, priming him for a payday. But French made a point to note that his company doesn’t work on commission and so isn’t just looking to rack up any old one-off deals going forward; it’s got a longer-term investment horizon in mind.10

Advisers to Fantex include former athletes like Kerry Kittles and John Elway.11 “Fantex represents a powerful new opportunity for professional athletes,” Elway said in a statement last week, “and I wish it were available during my playing days.” The Fantex model can be looked at as an insurance policy of sorts to pros, particularly in the NFL, where contracts are not guaranteed and the average career length is less than four years. But many athletes already struggle with managing their highly lumpy career earnings; this structure, with its large initial cash infusion followed by a 20 percent cut on income going forward, could only serve to exacerbate that. (French said athletes tend to get “swept up in this generalization” and that “the minority make it seem like they’re the majority.” He added that the company does extensive due diligence on personal finances.)

We all love Arian Foster, but just like the running back himself, things can turn on a dime. In his 2007 piece about Protrade, Lewis wrote: “Tiger Woods is a prime candidate to launch the new market. But Tiger Woods’ financial future is secure; he’s the sports equivalent of a blue-chip stock.” (He would soon turn into more of a … speculative investment.) The “Risks” section of the SEC filing on Foster makes mention of his recent admission that he received money while at the University of Tennessee as an example of where Fantex’s diligence failed to turn things up.12

And then there’s the hamstring.

“When you’re a player, you’re gonna pull muscles,” French said. “You’re gonna break bones. You’re gonna do all that kind of stuff. It’s a risk factor that something becomes catastrophic and ends your playing career and your ability to earn a salary from the NFL, no doubt about that. But I view it from a long-term perspective and building a brand. And it’s irrelevant what happened to him. Just my opinion.”

As the no. 1 standard investing disclosure has always gone, however, past performance is no guarantee of future results.

Katie Baker is a staff writer at Grantland.

Archive @ katiebakes