New model for monetizing human capital?

A new model of monetizing human capital has just opened for business. Yesterday, Fantex began trading shares backed by the future earning of football player Vernon Davis of the San Francisco 49ers. Unlike the standard asset-backed securitization (like the Bowie Bonds – see earlier posting) where the bonds are backed by future royalties, this linkage is indirect. As the New York Times (“I.P.O. Linked to Football Player Opens for Trading”) notes:

The investment does not give buyers a direct legal right to the athlete’s income. Investors accept a range of risks, even beyond the possibility that the player could become injured.
While the stock simulates owning a portion of an athlete’s brand, it is actually an ownership interest in Fantex itself, and the company is allowed after two years to dissolve the tracking stocks and convert them into shares of the management company.

Fantex explains that they are an brand building company and that this is a tracking stock, not an asset-backed security:

To finance the acquisition of the contracts, Fantex, Inc. intends to offer equity securities in Fantex, Inc. and establish a tracking stock linked to the separate economic performance and value of the brand associated with the tracking stock – such as income earned from contracts, endorsements and appearance fees. Fantex, Inc. will typically attribute 95% of the acquired brand income under the brand contract to the tracking stock. In addition Fantex, Inc. will attribute to the brand certain expenses of Fantex, Inc. including in certain cases specified expenses related to other tracking stocks that may be issued in the future. Holders of shares of a tracking stock will have no direct investment in the business or assets attributed to the brand contract, associated brand or athlete. Rather an investment in a tracking stock will represent an ownership interest in Fantex, Inc. as a whole.

The tracking stocks have been around for some time but idea of tracking a person’s future income is an new twist to the monetization process. These types of financial instruments allow for very specialized investments but are subject to portfolio problems and therefore high risk since they essentially bet on one particular asset. For this reason, most intangible-backed securitizations contain a pool of patents to spread the risk – such as Royalty Pharma’ patents portfolio.

It will be interesting to see whether this tracking stock model become a more wide spread means of intangible monetization.