5:00am PT by Eriq Gardner
Should Jennifer Lawrence Have an IPO for Herself?
This story first appeared in the Oct. 10 issue of The Hollywood Reporter magazine.
Is the world ready for a Tom Cruise IPO? How about trading shares of Melissa McCarthy for a piece of Ben Affleck?
It might not happen this year, but don't be surprised if one day soon, celebrity fandom mixes with market capitalism to produce stock offerings tied to the income of top-earning stars such as Robert Downey Jr., Sandra Bullock or Denzel Washington. According to Buck French, CEO of Fantex, Inc., his company certainly has such designs.
Fantex, based in San Francisco, is a recently launched trading exchange where investors can buy and sell interests in real-life people. So far, Fantex has focused on professional athletes, launching IPOs for San Francisco 49ers tight end Vernon Davis and Buffalo Bills quarterback E.J. Manuel. In September, Fantex announced its latest signing — Chicago Bears wide receiver Alshon Jeffery, who will be offering investors a 13 percent stake in his future income from playing contracts, endorsements and other activities related to football. In return, Jeffery will get most of the $7.94 million being raised from the stock offering up front.
In focusing first on athletes, Fantex is attempting to capitalize on the fervor around fantasy sports to give "owners" even more rooting interest. But French says he believes the same financial model holds "tremendous potential" for top actors and music superstars who have become brands in their own right and have projectable cash-flow streams to offer. For instance, if a star like Jennifer Lawrence decided to go public using the Fantex model, she would agree to sell Fantex a portion of her future income from acting, endorsements and appearance fees. In exchange for a big check up front, Fantex would collect her earnings, sell the shares to investors and decide when to pay out dividends. Lawrence would keep the authority to make her career choices, meaning the investors would never have a say in whether she returns for the next X-Men sequel.
Still, this prospect gathers mixed reactions in Hollywood.
Schuyler Moore, a film finance lawyer at Stroock, is optimistic at the idea of generating up-front cash for entertainers and establishing a new vehicle to leverage a star's fan base. "I can almost guarantee it's going to happen," he says. But there are skeptics, such as attorney Ken Hertz, whose clients include Will Smith and Britney Spears. "One problem is this: It creates a relationship with potentially thousands of strangers looking over your client's shoulder, curious about their personal and professional choices," he says. "All the waivers in the world can't make that a good idea."
Fantex wouldn't be the first to allow investors to share in entertainer income. In 1997, rocker David Bowie began offering bonds based on his future revenue, with his older recordings used as collateral. But according to attorney Donald Passman, author of All You Need to Know About the Music Business, the "Bowie bonds" model never took off because the high fees and tax payments represented a more expensive option for entertainers than just borrowing from a bank.
Fantex also wouldn't be the first to allow fans to treat entertainers like public corporations. Cantor Fitzgerald runs a platform called the Hollywood Stock Exchange that allows users to buy and sell virtual shares of films and celebrities. At its height in 2010, it reported 1.7 million users, and there were plans to begin using real money. Then the government put a stop to it and the hype died down, though it's still quietly in operation, with about 55,000 users.
No company has gone quite as far as Fantex. The start-up registers its listings at the SEC and uses Latham & Watkins, a white-shoe law firm, to conduct due diligence on its offerings and prepare prospectuses. French says athletes "remain CEO of their brand," though Fantex is given audit rights to verify income. To French, the biggest difference between athletes and actors is the "lumpiness" of entertainer income, meaning paychecks can vary depending on creative choices or hot and cold streaks. He gives the example of John Travolta as an actor whose career has seesawed unpredictably. That would make projections more challenging — but not impossible.
Kleinberg Lange attorney Jill Smith, who previously worked at Dustin Hoffman's production company, says she commends Fantax's entrepreneurial spirit, "but once you get past that highly superficial appeal, I see a lot of problems in this concept: What happens when the actor decides to take a couple of years off to have a family? Go on a year-long humanitarian aid trip? Check in to rehab? Or, perish the thought: retire?"
Even if actors signing up with Fantex disclaim any fiduciary duties to investors and don't mind sacrificing secrecy about their pay, a stock market for entertainers raises other issues that would need to be sorted. For example, Greenberg Glusker attorney Andrew Apfelberg expresses concern over "insider trading, given the numerous people who would know that an actor is signed up to do a given project long before the public ever knew."
But fans of celebrities might not necessarily care that actors and musicians represent a riskier asset class than, say, U.S. treasury bonds. As for why talent would sign up for an IPO, French argues that there is an upside beyond a quick payday: "We're premised on the idea that if you forge a financial interest linked to the brand, then you have not just investors, but advocates."