The basic concept sounds simple: You buy shares in the future of a brand, and if the brand does well, the price of your shares goes up. But in this case, the brand in question is a person. Fantex, a San Francisco-based “brand-building” company, is planning to offer IPOs on athletes. Its first signing is Houston Texans running back Arian Foster. Upon consummation of the IPO, Fantex says it will pay Foster $10 million in exchange for 20% of his future earnings. The company would raise the $10 million from investors who could buy shares, starting at $10. Their value would rise and fall with Foster’s performance. Fantex has also announced a second client: San Francisco 49ers tight end Vernon Davis.

The concept — novel, though not entirely unprecedented — has excited some fans, promising a way to express an emotional connection to the game and its stars. It has also raised a number of red flags. “Pretty distasteful” is how Reuters columnist Felix Salmon referred to the concept in a piece that declared Fantex the “bad investment of the day.” He called the language Fantex used in its prospectus “deliberately dehumanizing: The athlete is referred to not as a person, but as a ‘brand,’ throughout.”

Sports ethicist and Rockford University philosophy professor Shawn E. Klein says not to worry about players being exploited. “The athletes considering such deals would almost certainly make the decision in consultation with their business managers, who might have a better sense of the financial intricacies,” he notes. “But, more to the point, these are adults who ought to be free to make such decisions, even if they might be bad decisions. It is a potentially interesting way for an athlete or other stars to realize part of the financial gains from their future earnings now, rather than space them out over time, or hedge against the loss of that earning power in the future — and so not lose out on those potential earnings completely. In that way, it seems like a potential boon.”

Whether the idea can make money for investors is a different question altogether. IPOs typically carry “a huge amount of uncertainty,” says Wharton finance professor Luke Taylor. “When Twitter went public, no one knew whether it was going to make any money. Some of these companies that go pubic flop, [while] others do spectacularly.”

But in fact, the Fantex IPO is structured to relieve players of the high risk associated with their careers, and to pass that risk on to others, several observers say. “I see the appeal to the players, but it’s hard to see the appeal to the investors,” says Wharton operations and information management practice professor Cade Massey. “This is an extraordinarily idiosyncratic, volatile investment.”

“This is an extraordinarily idiosyncratic, volatile investment.” –Cade Massey

Jesse David, a partner at consulting firm Edgeworth Economics, which has tracked player injuries in the NFL, goes one step further: “I hesitate to call it an investment. It’s a risky bet.”

Precarious Assets

Word of Fantex’s IPOs comes amid a maelstrom in professional sports over the physical toll of playing in the National Football League — both the sudden injuries that can end a player’s career in a flash, as well as long-term degenerative conditions, such as dementia and Parkinson’s, that sometimes become evident only years later.

“They are merchandising human beings, let’s be honest,” offensive lineman John Moffitt recently told The New York Times after quitting the Denver Broncos — and the NFL entirely — because of concerns about the toll the sport takes on the human body. “I don’t want to risk health for money,” he said. But Foster and Davis made a different calculation, and, unwittingly, proved Moffitt’s point. Shortly after Fantex announced its IPO with Foster, the running back injured himself and underwent back surgery, ending his season. Fantex postponed the IPO until what it called “an appropriate time in the future based on an assessment of these events.” At about the same time as Foster’s season-ending surgery, Davis suffered a concussion. Fantex has made no announcement about the future of that IPO. A Fantex spokeswoman declined to make available a representative from the company for an interview, citing the IPO’s quiet period.

Investors betting on the future of any professional athlete can expect a wild ride. An analysis of NFL injuries by Edgeworth Economics found that players suffered more than 16,500 injuries between 2004 and 2009 – 1.5 injuries per player each year. A player stands a one-in-seven chance of suffering an injury requiring surgery that will end his season prematurely.

According to Wharton marketing professor Americus Reed, this presents Fantex with an opportunity — if they can cast the company’s intentions in an honorable light. “The climate around the NFL right now is very toxic in terms of player health and safety, and the NFL is the only league where there are not guarantees, except for a small signing bonus,” he notes. “When they build these numbers around a hundred-million-dollar contract, it means nothing if [the athletes] can’t play. So there’s a place for Fantex to insert itself as a hero in this, trying to find innovative ways to extend money-making opportunities [beyond the field] while trying to get fans closer to their favorite sports icons.”

What do sports fans say? “The idea is interesting, and a lot of people are excited about it. There’s a lot of chatter,” says Jason Sosa, senior lecturer at Rice University’s department of sports management. “But once people dig down deeper and look at the whole Fantex website and see how it works — when you view the risk as a level-headed consumer — this is something you would stay away from.”

In a way, it’s not unlike investing in a racehorse. But racehorses don’t get drunk and tweet thoughtlessly — or make racist and homophobic comments. “If you are going to put yourself out there as a brand and be traded as a public entity, then it raises the stakes,” says Reed. “If Fantex is going to be seeking sponsorships, athletes won’t be able to make this moral de-coupling argument — the Tiger Woods kind of thing: ‘I am flawed; I am human.’ This sort of model gets thrown out if you are a brand and I am investing in you.”

An Alignment of Interests

Ethicist Klein says: “It seems unlikely this will ever get that big, both in terms of the number of athletes and the number of investors. But I also don’t see an obvious moral downside, even if it does become a more regular feature.” Reed points out that Fantex’s first two clients are not first-tier powerhouse names in sports marketing — on the magnitude of LeBron James or Kobe Bryant — and so they actually stand to gain from the marketing muscle promised by a firm such as Fantex.

“It seems unlikely this will ever get that big, both in terms of the number of athletes and the number of investors. But I also don’t see an obvious moral downside.” –Shawn E. Klein

Kenneth L. Shropshire, director of Wharton’s Sports Business Initiative and past president of the Sports Lawyers Association, says that for a player who needs or wants that big upfront payment against future earnings, this can be a good deal. The potential, he says, comes from the fact that the interests of Fantex and the athlete are basically aligned: Both are invested in developing career possibilities off the field with product endorsements and other marketing opportunities. “If you are not someone who has a long-term marketing plan or vision, this is an enterprise that might provide it. These guys are entrepreneurs, and if you are an entrepreneurial person, these are the kinds of people you might want to partner with.”

Asked whether he would invest in Fantex, Shropshire had a cautious response. “It’s not quite Kodak — or [any] company where you thought the company would be stellar forever and all of a sudden things change when you run into this digitized world. You are thinking about skill decline, whether natural or via injury. That’s the risk you know about going into it. I think [it depends on] what kind of appetite you have in terms of investing. Arian Foster is a good example. The day before the injury, it looks interesting. The day after, you just hope he’s okay.”

Scoring the Risk

But concussions, broken bones and immoderate public behavior are just part of what makes Fantex IPOs a treacherous investment instrument, analysts say. In materials it puts before potential investors, Fantex itself flags the “speculative, risky and complex” nature of the way its deal is structured. “These securities are not suitable for any other investment objectives such as growth or income. Check below to indicate that your investment objective for this account is speculative,” prompts the agreement.

In fact, in many ways, the deck looks stacked in favor of Fantex. Investors are not actually buying Arian Foster stock or Vernon Davis stock, but are purchasing “tracking” or “targeted” stock shares, which are meant — though not required — to be influenced by the performance of the athletes. Holders do not have voting rights and can only trade shares on the Fantex platform. Fantex Brokerage is the agent, so the company collects fees (1% on the total amount of the trade) on transactions.

“You can find a bunch of people out there who will put in $250 and [Fantex] will get the $10 million. But look what happened with Arian Foster. Who knows when he will play again.” –Carmelo Gordian

Moreover, since investors are actually purchasing shares in Fantex, the safety of the investment depends not on the success of your individual athlete, but on the health of the entire company. In other words, the athlete on whom you put your money may be succeeding, but the ultimate value of your stock is determined by performance of all the athletes on Fantex’s roster — unless you manage a well-timed in and out with your money.

Also, Fantex may not be available to everyone. Fantex IPOs hinge on the company clearing individual states’ “blue sky” laws designed to protect the public from fraud.

Still, investing is not always just about logic — it’s also about emotion. Fantex is counting on the idea that sports fans will sense that investing in a particular name is a vote of confidence in that athlete, and perhaps even the expression of a personal connection. “I can imagine quite a few people having that sentiment,” says Reed. “First of all, football is the number-one sport [in the U.S.]. You go to games and see people painting their faces and standing out there in the cold. They will put money behind players. But Fantex has to tell the right story around that, a human story that will leave investors wanting to be a part of it. What happens when a player gets traded and leaves our favorite team? I absolutely believe — in terms of latent demand, given what one sees around the fervor of fans — it certainly is a model that could be built.”

For many who will be lured by Fantex, due diligence won’t enter into the equation. Instead, says Wharton’s Massey, judgment will be colored: “They will think, ‘I’m the insider; I’ve been watching this guy since he was in college, and I’ve watched all his games.’ All this fuels familiarity, and familiarity fuels optimism.”

Fantex’s strategy to appeal to emotion over logic is especially apparent when you do the math, says Carmelo Gordian, an IPO attorney at Austin, Tex.-based law firm Andrews Kurth. Foster’s NFL contract pays $23.5 million through 2016 — if he plays — so in order for Fantex to break even on its $10 million payment to him, he has to reach the $50 million mark. “Does that make sense? That’s where I think what you are doing is playing with people’s emotions,” Gordian says. “In the world today, because of technology, you can reach a lot of people and expose your idea very quickly. You can find a bunch of people out there who will put in $250 and [Fantex] will get the $10 million. But look what happened with Arian Foster. Who knows when he will play again.”