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Athlete IPOs – Not Likely to Show You the Money

By [Tuesday, November 19th, 2013]

Arian FosterImagine a scenario where you have a couple of extra dollars, you’d like to invest them, and I’m your stock broker. Fear aside, you call me to discuss your options. I ask if you’re interested in the following:

  • Mutual funds? Sorry, didn’t mean to put you to sleep.
  • Savings Bonds? Cool until the United States credit rating is downgraded – again.
  • What about a professional athlete? Good joke, but that’s not even possible.

It wasn’t – until the creation of Fantex, Inc. According to its website, Fantex “signs a contract with an athlete to acquire a minority interest in their brand and builds a plan with a goal to increase its value, leveraging Fantex, Inc.’s marketing expertise.” The company appears to be trying to publicly replicate the “investment” opportunity that private investors have had for years in sports such as golf, horse racing and boxing.

The company’s initial public offering will be for Houston Texans running back Arian Foster. Fantex is paying Foster $10 million for a 20 percent stake in his future income, including contracts, endorsements and other related off the field business revenue. The IPO will offer 1,055,000 shares of “Fantex Series Arian Foster Convertible Trading Stock” for only $10 per share. Unlike many esoteric investments available only to high-net worth individuals, Fantex offers its stock to any United States resident who is 18 years or older. The company will begin taking reservations in the next two weeks and could begin selling shares as early as next month. Recently, Fantex reached a second deal with San Francisco 49ers tight end Vernon Davis.

DavisOn its face, this seems to be the opportunity fans have been waiting for. In a way, it brings fantasy sports to life. But there are significant risks involved. Due to the JOBS Act, companies under the “emerging growth” umbrella now have more regulatory wiggle room to attract investors. Accordingly, a company like Fantex can market itself to investors more broadly and with less underlying information than the SEC previously required. This is how Fantex can advertise to investors, with little context, its ability to “buy and sell stock linked to the value and performance of a pro athlete brand.” Sounds amazing, but what is an investor actually purchasing?

The investor is purchasing what is known as a “tracking stock,” which will theoretically mirror the performance of an athlete’s brand. But in reality, prospective investors are actually buying a convertible stake in Fantex Brokerage Services. Fantex is a money-losing firm that is just 12 months old with no experience in this investment market. In its prospectus filed with the SEC, Fantex concedes, “This offering is highly speculative and the securities involve a high degree of risk.” What’s more, the company admits “investing in our Fantex Series … should be considered only by persons who can afford the loss of their entire investment.”

While there is performance risk inherent in every investment, the risk associated with Fantex is heightened. Since investors are not buying equity in Arian Foster or Vernon Davis, they have no say in how the players choose to manage their career. Rather, investors are buying shares of Fantex the company, and in doing so are relinquishing traditional shareholder rights. Comparatively, shareholders in the traditional private equity context retain the right to determine if/when shares are converted. Under the Fantex model however, Fantex controls whether the investors’ interests in Foster/Davis’ brand income will turn into company common stock. Unsophisticated investors, the exact ones Fantex targets, probably won’t take the time to read Fantex’s 150-page prospectus and likely won’t know they’ve handed over all voting rights.

Similarly, Fantex is under no obligation to pass Foster/Davis’ earnings on to the shareholders in the form of dividends. Fantex’s only duty is to itself; the company can “reattribute assets, liabilities, revenues, and cash flows” as it sees fit. Investors will likely be left out to dry even when Fantex receives 20% of Foster’s earnings. And about those earnings – while investing an athlete’s brand sounds fun, pro athletes aren’t known for making the best business decisions. Before buying into Fantex, investors really need to be asking themselves if they are willing to bet on the business judgment of Arian Foster/Vernon Davis by way of a novice brokerage company.

Further, Fantex stock can only be traded on its proprietary exchange, which means a brokerage free will be attached to any transaction and investors will not have the opportunity to trade and sell on the open market. To quote Reuters, “This investment, then, is basically the worst of all possible worlds: if Foster fails, it fails, and if Fantex fails, it also fails. And even if they both do quite well, you’ll only be able to profit on your investment insofar as a completely separate business – the Fantex stock exchange – actually works.”

Possibly the biggest concern is the more than likely possibility that the company can go bust. That’s what happened to Protrade, a company with a nearly identical concept several years ago. While Yahoo eventually bought Protrade, it did so only after Protrade moved away from investing in athletes and morphed into a developer of sports-related cell phone apps. Overall, the risk of investing with Fantex is so high that New York Magazine discussed it at length in a feature piece titled, “The Age of Bullsh*t Investing is Back!

Up until now, the coverage of Fantex has predominantly focused on the fan’s investment, but that’s not the only issue. What about the athlete? In exchange for a percentage of their brand’s future income in perpetuity, the athlete agrees to accept an upfront payment. Under this model, athletes, likely in their mid-to-late twenties, must project their long-term earning potential and conclude their brand will not generate more money than they’ve agreed to give away. Using Foster as an example, the “break even” point is $50 million – 20% of $50 million would equal the $10 million upfront payment. If his brand generates more than $50 million over its life, Foster would then be giving away 20% of his money without receiving any benefit in exchange. This is immensely problematic as Fantex’s business model is premised on exactly the opposite occurring. Since Fantex wants the investor to focus on the athlete’s brand rather than their on-field performance, it is clearly focused on what the athlete does after they retire. The “How It Works” section of their website confirms this.

It’s also worth exploring whether the athlete truly knows what’s required of them upon entering into this deal. By agreeing to a deal with Fantex, the athlete is legally bound to produce quarterly earnings reports detailing the precise amount of money his/her brand generated. Additionally, checks for 20% of those earnings must be written to Fantex. If that’s not enough, the athlete and his advisors must now become familiar with federal insider trading laws. If an athlete or a member of his financial team discusses issues that might affect his earnings, the athlete runs the risk of violating federal securities laws.

Teams and leagues will surely be wary as well, knowing Fantex plans to expand beyond football players and many questions remain. What happens if an investor “shorts” an athlete’s stock, betting against their success? If an athlete buys his/her own stock, is that any different than Pete Rose betting on his own team to win a baseball game? Will gamblers be able to influence a player’s performance? It’s not that far-fetched.  The concept of Fantex is likely not an issue that leagues and unions negotiated over during the most recent round of collective bargaining. Might they now want, or even have, to? Could express language be incorporated into a standard player contract as to whether or not this type of agreement is permissible for an athlete to enter into?

From the NFL’s standpoint, might there already be a present conflict of interest? John Elway, the Executive Vice President of Football Operations for the Broncos, happens to be on the board of Fantex. Does this mean that he has to root for the success of Arian Foster and Vernon Davis? What happens if the Broncos play the 49ers in the Super Bowl? Elway surely knows that a strong game for Vernon Davis against his team could significantly increase the long-term value of his brand. Does his integrity now come into question?

Finally, what about the companies agreeing to endorsement deals with these athletes? Nearly all of those contracts contain confidentiality clauses that prohibit either party from disclosing exactly what the deal entails. Pursuant to the Fantex agreement, an athlete must fully disclose all deals that represent more than 10% of their “brand income.” Looking forward, if an apparel company wants to agree with Andrew Wiggins, the presumptive #1 pick in the 2014 NBA draft, on an endorsement contract comparable to the one’s signed by Derrick Rose and LeBron James, will that company grant a release from the confidentially clause and permit full disclosure so Fantex can accurately determine how successful that athlete’s brand is? Not likely.

At this point, the idea of Fantex leads to more questions than answers, and the questions posed merely scratch the surface. But with Fantex facing long odds, it’s likely they won’t need to be answered. However, if it beats the odds, it sure would be fun seeing a ticker flash: “Arian Foster 10.51 .50 (5.01%).”

 

For the Lawyers Negotiating the Other Side of Andy Murray’s Sponsorship Deals

By [Sunday, July 7th, 2013]

AndyMurray.WimbledonAndy Murray, Wimbledon trophy in hand, has become one of the elite global sports superstars.  Like David Beckham or Tiger Woods, his annual earnings from sponsorships and endorsements will now forever exceed his tournament prize winnings.  In the coming weeks, his career management representatives will be parlaying his Wimbledon victory — so soon on the heels of his Olympic gold and U.S. Open trophy — into lucrative deals with equipment manufacturers, credit card issuers, automobile companies, luxury watch-makers, and the like.  Good for him!

But what should the lawyers on the other side of those deals be thinking about?  Murray’s current deal with Adidas pays him more than $24 million over 5 years (through the end of 2014).  As the lawyers responsible for negotiating and drafting a contract in that stratosphere, how best to protect your client’s investment?  Here are seven risks and contingencies the company contract negotiator should have in mind:

  1. Disaster Planning.  There is no reason to think Murray will not continue to be healthy and sound in mind and body, thrive in his career, and enjoy a happy and unremarkable private life.  A sports star of his athletic and moral caliber would appear to be an ideal partner in an endorsement deal.  But every athlete risks injury or fading of his on-court powers, and consequent fading of the value of the sponsorship.  Off-court issues can also affect the athlete’s value as a spokesperson. Whatever might make gossip-column fodder — run-ins with the law, relationships gone sour, all sorts of peccadilloes — can degrade the sponsorship.  The contract must account for this risk with a termination provision in the event Murray’s tennis career is significantly interrupted or shortened, and a morals clause in the event of bad behavior.  In addition, the company should insure for injury, death, and scandal.
  2. Athlete’s Duties.  Everything always looks rosy at the outset of a sponsorship deal, with the athlete gushing enthusiasm for the company and product.  But then it’s time to show up for a promotional event or tv ad shoot.  And the athlete must trade out his wardrobe and accessories for the sponsor’s products.  Don’t rely on good will for the athlete to perform his side of the bargain.  Lay out every element of performance with specificity, from where, when, and how often the athlete should use the sponsor’s products, to dates, times and locations of personal appearances.  Define logo placement and size on the athlete’s apparel/accessories.  Establish geographic and temporal coverage.  Anticipate potential conflicts — existing deals and potential future relationships — and limit where possible the athlete’s association with the company’s direct and indirect competitors.  Ideally, obtain veto rights over the athlete’s future sponsorship deals in relevant categories.  Enumerate every obligation and the nature of the athlete’s performance.
  3. Intellectual Property.  The company is bringing value to the table beyond that fat paycheck it’s writing to Mr. Murray.  Sponsorship deals deploy a company’s prize intellectual property such as trademarks, copyrights, and similar assets, including property created during the course of relationship with the athlete.  To clarify and protect these rights, the sponsor should insist on retaining ownership of all such rights — in existence at the outset and created during the term of the agreement.  This necessitates the athlete agreeing either that his performance under the contract is a “work for hire” or that he forever assigns his rights to the sponsor.  So when the athlete loads sponsor logos onto his Facebook page, appears in a YouTube video in sponsor apparel, or tweets about sponsor products, there is no mistake that he does so as an agent of the company for the purposes of future intellectual property ownership.  And for precisely that reason, the sponsor should reserve the right to review in advance all such athlete uses of social media or any public testimonial about the company or its products.
  4. Risky Pastimes.  Most major league sports — in which the athletes are employees of a team — place substantial limits on risky pastimes.  The NFL standard player contract prohibits players from engaging in “any activity other than football which may involve a significant risk of personal injury.”  The NBA frowns on motorcycling, skydiving, and hang-gliding.  NHL team members cannot play any other sport without their club’s written consent.  In individual sports, like tennis, the player must self-regulate.  Sponsors might want to manage the risk of a risk-taking athlete by placing off limits any off-court recklessness for the duration of the contract.
  5. Release and Indemnity.  Murray’s performance of his sponsorship-related duties may entail activity that risks injury, including playing the very sport that won him the deal in the first place.  If he is injured playing tennis at a sponsor event, or on behalf of the sponsor, he may seek to hold the company liable.  That exposure should be eliminated with a provision in which the athlete acknowledges the risk of playing his sport, and releases and indemnifies the sponsor for any playing-related injury.
  6. Boilerplate Basics.  Don’t overlook the details of what many lawyers dismiss as the boilerplate provisions of the contract.  Care is required for such provisions as notice and payment, choice of law/forum, and force majeure.  When it comes to notice and payment, sponsors should account for the possibility that the athlete will change representation.  Avoid getting mixed up in payment/commission disputes that can arise between athletes and their former agents with specific contract language about the limits of the sponsor’s exposure in this event.  Athletes often change domiciles, so it makes more sense for the choice of law/forum provision (in the event of a contract dispute) to accommodate the sponsor.  Sports events are more vulnerable than ever to schedule disruption due to everything from catastrophic weather to terrorist threats.  To the extent aspects of contract performance will occur on site at tournaments, contingency planning is necessary.
  7. Termination.  Termination of the sponsorship relationship is inevitable, ideally because it has run its course successfully, with both parties satisfied with each other’s performance.  An amicable parting should be built into the initial contract, with provisions for ultimate non-renewal, accounting of outstanding payments and receivables, and resolution of any rights ownership issues.  But contract termination may be necessary in less ideal circumstances (see point 1), for example, if a party is in breach, an unfortunate injury shortcircuits a playing career, the athlete’s bad behavior undercuts his spokesperson value, or the sponsor goes broke.  Whatever the reason for premature termination, the contract should provide clarity and predictability in terms of both the process of termination and substantive outcomes.  And the sponsor should remain alert throughout the duration of the contract for performance issues — failure to police and correct the athlete’s lapses in performance may result in forfeiting termination rights and remedies.