The New 'Human Equity' Transactions

Abstract

In the past year, a number of new financial transactions (such as the Fantex, Upstart and Pave transactions) have emerged that allow individuals to raise funds by offering a percentage interest in their future earnings. Unlike traditional lending arrangements, these structures essentially enable the funding provider to take a percentage of the recipient’s future return on their human capital for a specified time period, effectively getting the upside if earnings are higher and the downside risk if earnings are lower than anticipated. Such transactions represent a significant departure from traditional forms of lending and pose serious questions for the legal system. In this essay, we survey some of the issues raised by these new transactions, and suggest some possible ways in which the law can approach their regulation. In particular, we think that debt-equity analysis, a concept currently employed in the corporate tax and business context to distinguish lenders from true owners, is an exceptionally powerful frame through which these arrangements may be analyzed. The debt-equity frame compels us to examine the uncomfortable possibility that these arrangements are, in substance, ownership interests in human persons created via financial contract.

Keywords: Tax, Taxation, Tax Policy, Business Entities, Corporations, Debt, Equity, Ownership, Human Capital, Lending, Human Equity, Fantex, Upstart

JEL Classification: H20, H21, H22, H23, H24, H25, H26, H63, K20, K22, K23, K34, E62