Texans RB Foster becomes an IPO. More to follow on the 'jock exchange'?

Last month, Houston Texans running back Arian Foster announced that he would kick off the first initial public offering on the Fantex athlete stock exchange. In return for the lion's share of the money raised through the IPO, Mr. Foster will hand over a percentage of his future earnings from what he does both on and off the field.

The company behind this idea, Fantex Brokerage Services, hopes to launch the largest offering of celebrity stocks in history. With a second athlete, San Francisco 49ers tight end Vernon Davis, already on board, Fantex chief executive Buck French imagines a bustling stock exchange where fans and investors can trade on the value of personal brands.

"Our goal is to have athlete brands in all major sports, and globally as well," he says.

When the Foster stock officially goes on sale in a few weeks, the Pro Bowl star will receive $10 million from the IPO. In exchange for that lump sum, Foster will pay Fantex 20 percent of his future earnings, including football contracts, endorsement deals, and appearance fees. Fantex says 95 percent of that money will go into a "tracking stock" for investors, with the remainder lining its own pockets.

As with other tracking stocks, investors will not have any ownership over the actual brand. Foster may lead his professional life in whatever direction he sees fit.

If the 27-year-old has a long career in designer-watch ads and ESPN spots, investors could turn a nice profit. If he's on the far end of his career, however, the IPO will be little more than a novel stimulus package for Foster.

"I think it's pretty dubious," says Craig Pirrong, a finance professor at the University of Houston. "The sport in which [Fantex's plan] is least likely to work out is football, at least from an investor's perspective."

Foster, to boot, is out for the remainder of the NFL season with an injury. 

Football is a high-risk sport

Among major sports, football has the highest risk of career-ending injuries, Mr. Pirrong explains. Players in the National Football League last, on average, six years. Foster is already in his fifth. And with his current salary of about $6.7 million, Foster will need to rack up some hefty endorsement deals before he'll earn the $50 million needed for investors to simply break even.

"If it's priced properly, such a stock could still make a lot of sense," he says, "but it seems to me that the price they're asking [for Foster] is very rich."

Mr. French acknowledges that these tracking stocks are highly speculative. In prospectus submitted to federal regulators for the Foster deal, Fantex says that it has never tried this before and thus the risks are unknown.

The exact terms of each stock could differ greatly, as Fantex tries to balance an athlete's history, his or her public persona, the risks of a given sport, and what the celebrity wants out of the deal. For example, Mr. Davis will receive $4 million for 10 percent of his future income.

Foster and Davis are not the only stars to emulate Wall Street. In 1997, musician David Bowie issued what many consider to be the first celebrity stock. These so-called Bowie Bonds paid out based on royalties collected from the 25 albums he released before 1990. Mr. Bowie then borrowed $55 million against this promised income. According to Fortune, Bowie paid back his investors, with 7.9 percent interest, over about 10 years, although official details were never released.

Investment banker David Pullman, the mastermind behind Bowie Bonds, set up similar securities for several songwriters, including Jake Hooker, who co-wrote Joan Jett's "I Love Rock 'n' Roll," and Duane Hitchings, who co-wrote Ron Stewart's "Young Turks."

But celebrity stocks nearly disappeared after the late 1990s. In 2004, as the music industry struggled with piracy, even successful securities, like Bowie Bonds, were rated at near-junk status. Last year, with the rise of Apple's iTunes and other legal music marketplaces, Goldman Sachs attempted to issue a bond tied to song royalties from Bob Dylan and Neil Diamond. Investors didn't bite.

Creating higher owner advocacy

In 2008, minor-league baseball player Randy Newsom tried to sell stocks based on future earnings if he made it to the big leagues. He scuttled the plan after taking heat from both the US Securities and Exchange Commission and Major League Baseball.

Now, with the popularity of fantasy sports teams, Fantex wants to increase fan investment – literally. By letting people buy into an athlete's future success, French says fans will have an interest in keeping even retired stars in the public eye.

"We feel that if you actually create an ownership interest that's linked to the value performance of the brand and you get it in the hands of the public, with social media today, you can create a level of owner advocacy that you otherwise wouldn't have," he says.