On Celebrity IPOs

There is a trend occurring in the world of celebrity sports that may soon spread to movie stars and other celebrities: personal brand IPOs.

While there is no specific case being brought to attention – at the moment – related to this possibility, it could potentially result in interesting legal and financial consequences, when it comes to IPOs.

Before we discuss the potential results of such a venture and the companies that are looking to enter this field, we should first define the terms “IPOs” and “insider trading.”

What are IPOs

IPOs – or Initial Public Offering – is the event that occurs when a company is first “taken public.” For the beginning of most companies’ lives, investment is limited to private sources at the discretion of those companies’ leadership. This means that if I were to launch a new company called “Example LLC,” you would be unable to invest in it unless you approached me and we agreed to work out a deal.

As Example LLC grows, it might reach a point where it needs a large amount of funding to continue growing. Debt and private investment are very possible avenues to back this funding, however, I might decide that public investment is a better course of action.

I would then begin negotiations with one or more investment banks that would act as underwriters for my IPO. The bank and I would work together to reach a share price and equity level that would meet the needs of the company while still allowing the bank to make a profit. I might then sell 10,000 shares of Example LLC at $10/share for a total of 15 percent of the equity in the company. Example LLC would have $100,000 with which to grow, and the banks that bought these shares could go on to sell them on a securities exchange for a markup.

Insider trading

Insider trading occurs when an individual who may or may not hold shares in a company receives knowledge from within the company that gives him or her knowledge about the future value of its shares. This allows the individual to compete unfairly in the securities market.

As a simple example, imagine that one of my friends were to purchase shares worth 5 percent equity in Example LLC. Everything appears to be going well, but I now know that a much anticipated deal between Example LLC and Illustration Corp is about to fall through – rendering my friend’s shares worthless. If I were to tell my friend about this situation and he or she were to sell these shares before the failed deal became public knowledge, this would constitute insider trading.

There are a number of laws on the books that outlaw insider trading, but notably 17 CFR 240.10b5-1, which attributes criminal penalties to trading on the basis of material nonpublic information.

Celebrity IPOs

In general, celebrity IPOs allow individuals of high public interest to sell portions of their future earnings in exchange for large sums of money in their pockets. Already, a company called Fantex has launched IPOs for Vernon Davis of the San Fransisco 49ers and E.J. Manuel of the Buffalo Bills. The company has focused thus far on sports stars, but hopes to soon move to actors and musicians with projectable cash-flow streams.

There are obvious advantages for everyone involved, but also potential legal pitfalls. Large numbers of people frequently have early information about upcoming contracts in the entertainment industr, and these people are less centralized or traceable than the employees of a company. This could give rise to problems with insider trading.

There are also issues with fiduciary duty. Once a company makes an IPO, the directors of that company have a legal duty to act in the best interests of their shareholders. Fantex says that the celebrities it represents “remain the CEO of their brand,” but it is difficult to tell what might happen if a celebrity made a large IPO and then decided to retire.

Celebrity IPOs appear to be legal at the moment, and may be attractive to fans who believe in the potential earnings of their chosen star or who simply want to show their support. I would suggest, however, that investors remain extremely cautious before treading in this as-of-yet largely uncharted legal territory.

As a New York entertainment attorney I come across many cases regarding celebrities and their legal issues. Check out some of my previous posts regarding this topic:

• Jay Z’s Two Lines of Legal Defense
• Katt Williams vs. His Employees
• Celebrities & Their First Amendment Rights
• Common Contract Mistakes Made in Hollywood
• Pharrell Williams, will.i.am Settle Trademark Lawsuit
• Chelsea Manning, Edward Snowden & Celebrity Nudes
• Operator of Celebrity Fan Websites Hit With Costly COPPA Violation