Investing In Athletes

Fantex recently announced its first pro athlete IPO. The company will issue 1 million shares of tracking stock at $10 each, with the proceeds to be paid to Houston Texans running back Arian Foster. In return, Foster, or the "brand" as he is called in the prospectus, will give Fantex 20 percent of his future earnings. Right now, you likely believe that the stock price will depend on Foster's future earnings, and it will to a degree. But further reading unlocks a host of other risks. For example, the company may never pay dividends to stockholders, but instead reallocate the cash for company expenses. Or, the company can convert the Foster stock into shares of Fantex stock at the discretion of company management. If Fantex fails, investors in Foster stock are left with one percent (or less) of the bankrupt company. All in all, Arian Foster stock appears to be a very risky investment, which brings us to our main point: Many believe that SEC approval of a prospectus means that the SEC feels the security is a good investment. In reality, the SEC merely reads the propesctus to ensure that all required information and risks are disclosed in the prospectus. The SEC does not certify that the security is a good investment. It is up to the individual to determine if the investment is appropriate for their risk tolerance.