What’s Your Return-on-Running-Back?
- Joshua M Brown
- October 18th, 2013
The JOBS Act (Just Open Bucket Shops) was a hastily cobbled together re-writing of the investor protection rules that is ostensibly meant to somehow “create jobs” but will more likely result in the systematic ass-raping of sub-120 IQ investors who happen to be in possession of a large sum of money.
Under JOBS, high-cost hedge funds, risky venture capital entities and all manner of private, untested companies can advertise and market themselves as investments directly to the public, so long as that public is “accredited.” Banks and foundations and other institutions are considered to be accredited almost automatically. As for individual investors, the SEC defines accreditation thusly:
“a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;”
“a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;”
Under this definition, Anna Nicole Smith was “accredited” shortly before her daily regime of human growth hormones, benzodiazapams, Peanut M&Ms and fistfuls of Klonopin took her to the other side.
Under this very same definition, brain surgeons, defense attorneys, professional athletes, rappers and interior decorators on the upper east side would also be “accredited” and should thus be able to determine good complicated investment opportunities from poor ones. Also, people who’ve inherited a lot of money and have never worked a day in their lives as well as some performing children with sitcom deals and clothing lines at Target. They have money so they must be smart and capable of assessing investment risk, goes the logic.
Now of course, very few of these so-called “accredited” investors have any business making these types of determinations for themselves nor should they want to. That is, until the right person with the right line of shit gets them into a glass conference room with river views and a cappuccino machine. Then they think they’re Gordon Gecko fielding offers and “putting their money to work.”
It will end badly.
Hedge funds open and close every day, often after exacting huge fees for their efforts and leaving their LPs with capital losses and missed opportunities elsewhere. 75% of all venture-backed startups fail after a few years. And as for private placements and Reg D offerings….let’s just say that the person who sells you one absolutely hates you because they are almost 100% of the time a “muder hole” for your capital. Please see Stockbrokers: A Guide to Private Placement Due Diligence for more on this subject.
Regarding crowdfunding, which also gets a boost thanks to JOBS, I realize that some early adopters have had some success and that’s cool. But like any other type of investment scheme, the more crowded it gets, the more bad offerings will become available and the harder it will be to get in on the good deals.
And then there’s this, which I had to read about twice to make sure I wasn’t losing my mind or anything. Turns out I wasn’t, but everyone else is…
Fantex — a highly risky startup company which is losing money and which has precious little income with which to cover its substantial expenses.
The vast majority of the shares in Fantex — 100 million, to be precise — are closely held by its founders and backers. But another 1 million are being sold to chumps at $10 apiece, to raise the $10 million that Fantex is going to pay Arian Foster, who currently plays football for the Houston Texans. The chumps are buying something called a “tracking stock”, the performance of which is supposed to mirror the economic fortunes of the 27-year-old athlete. And maybe it will. Or, maybe it won’t. The directors of Fantex are under no obligation to pass Foster’s earnings on to shareholders in the form of dividends — even assuming that the contract with Foster does indeed do what it’s meant to do, and result in Fantex receiving 20% of Foster’s earnings, more or less in perpetuity.
Yes, you’re reading that correctly. We now have an environment in which you can securitize the future earnings stream of a running back in the NFL and pay out the cash flow each year until he retires or concusses his skull to the point of madness, whichever comes first. You can see where this is heading – price-per-carry metrics, tackle-to-touchdown ratios and so on.
When David Bowie sold his song catalog into a bond structure so as to make payments of royalties available to investors, it was almost done tongue-in-cheek. There goes the Thin White Duke aka Aladdin Sane aka Ziggy Stardust – for his final transformation, David Bowie will literally turn himself into money. Of course, when music sales fell (as they are wont to do), the bonds were cut to junk status. Blame it on the Spiders from Mars.
And now they’ll be calling you to invest in the career of a professional athlete via a private trust. Okay.
Do yourself a favor and let that call ring straight through to voicemail.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.