Royalty Exchange has formed a new company and signed a letter of intent to buy at least a 15 percent slice of an income stream of royalties derived from Eminem music, with plans to buy other musical assets and take the company public.
Today (Sept. 25), the new company, Royalty Flow, is expected to file with the U.S. Securities and Exchange Commission to raise between $11 million and $50 million via a Regulation A+ crowdfunding effort. If it's successful in meeting its minimum funding target, it will then list with NASDAQ, provided it meets the exchange’s qualifications.
Depending on how much money is raised, Royalty Flow will buy either 15 percent or 25 percent of an Eminem income stream based on royalties paid to FBT Productions, the Bass Brothers company that often works with and produces Eminem’s music, from the artist’s studio albums released between 1999 and 2013 via Aftermath Entertainment/Interscope Records. That includes albums like The Marshall Mathers LP and The Eminem Show. The royalties also come from some Eminem tracks on side projects as well.
According to a press release made available to Billboard in advance of the filing, the Eminem catalog has sold 172 million albums worldwide, while Nielsen Music says 47.4 million of them have been sold in the United States.
According to Joel Martin, who manages FBT Productions, and Royalty Flow CEO and Royalty Exchange president Jeff Schneider, the plan is to let Eminem fans and investors share in income from royalties for his music through dividends paid by the company, once it is listed on NASDAQ. For its initial offering, minimum investment is $2,250 for 150 shares, which works out to $15 a share.
A memo on the filing for the SEC stated FBT has been paid $47.2 million since 2011, or an average of $7.9 million a year, although the amounts vary widely: In 2012, the company received $3.7 million; in 2014, $14.5 million. So far in fiscal 2017, FBT has been paid $1.94 million as of March 31, 2017 with the fiscal year ending Sept. 30. In order to meet SEC qualifications, the last four to five years of those royalties have been audited, even though the agency only requires two years of audited numbers for a Regulation A Tier 2 filing.
The Regulation A+ filing to allow for crowdsourced funding was created by the JumpStart Our Business Start-up (JOBS) Act, signed into law by then-President Barack Obama in 2012.
While Royalty Flow is using a broker dealer for assistance in meeting the compliance requirements of a Regulation A filing, the offering doesn’t need and will not have an underwriting investment bank.
Intercope, Emimem’s label, issued a statement on the deal, saying, “Eminem is not involved in any deals for the sale of recording royalties and has no connection to this company. The decision to offer the royalty stream for sale or otherwise was made independently by a third party who retains royalties for an early portion of his catalog and Eminem was not consulted.”
While the first investment it is making is in master recordings, Royalty Flow will also consider investments in publishing catalogs as well, but expects to remain a passive investor, without control of the assets. The company says it intends to acquire and hold royalties from music catalogs of the world’s biggest music artists. While there are plenty of investment opportunities in music assets, so far not many superstar assets have come up for a partial purchase like this.
In fact, Royalty Flow may be creating a new business model for other superstar artists, if their approach proves successful. Indeed, the company calls itself one-of-a kind, designed to acquire and hold royalty catalogs of music and other media.
“Royalty Flow gives investors the opportunity to participate in assets that are uncorrelated with public markets, and directly benefit in the music industry’s growth,” Royalty Exchange CEO and Royalty Flow’s chairman Matt Smith said in a statement. “It also gives artists, producers, labels, songwriters, publishers and other rights holders a powerful new financing option with a level of transparency seldom found in the music industry.”
Depending on how much it raises, Royalty Flow has the option to buy 15 percent of the FBT royalties from Eminem music recordings or 25 percent. Applied against last year, that comes out to between approximately $714,000 and $1.19 million.
Thanks to a landmark lawsuit in 2012 in which FBT sued the Universal Music Group claiming they were entitled to 50 percent of money received from downloads and streaming because the music was provided to Apple and streaming services through licensing deals, the ruling said digital deals constituted a license, thus FBT gets a 50 percent percentage in perpetuity.
If the proceeds from the crowdsourced offering are less than $25 million, Royalty Flow will exercise the 15 percent option and pay FBT $9.75 million. If they raise more than $25 million, they will buy 25 percent of the income stream for $18.75 million.
While Royalty Exchange executives say they will sell up to 80 percent of Royalty Flow, there are two classes of stock and management will likely retain complete control of the company through its sole ownership of class B shares, which will have 10 votes per share, while the class A shares will have one vote per share.
Beyond the Eminem investments, the company will pay out some of the income it gets as dividends and re-deploy some of the funds to make additional investments. “We hope to buy assets that will appreciate over time and as that occurs, it could increase the value of the stock prices,” says Royalty Flow CEO and Royalty Exchange president Schneider.
Royalty Flow will be run separately from Royalty Exchange because they are two different business models. Royalty Exchange is an auction platform that allows investors to bid and buy an asset with one winning bid in the end; while Royalty Flow allows for multiple investors to own a piece of the assets.
Since its inception, Royalty Exchange’s auctions have sold songwriter royalties for music recorded by Rick Ross, Kevin Gates, Dr. Dre, George Clinton, Britney Spears, Kacey Musgraves and the Bee Gees.
“We believe Royalty Exchange is the new model for music financing,” said FBT manager Martin. “We’ve supported increased transparency for artists our entire career, and Royalty Exchange is no different. They give investors simple, direct access to royalty opportunities that previously were available only to industry insiders. This changes everything.”
Martin chose to use the Royalty Flow model because FBT didn’t want to sell their copyrights, just an income stream. “We were approached by many people who wanted to buy our assets, but we are not interested in selling the entire asset,” Martin says. “Now thanks to the Obama JOBS act, you can actually sell an interest in royalty streams.”
The other difference between the model is the size of assets involved, with Royalty Exchange likely to deal with smaller assets that one investor can afford to buy, while Royalty Flow will buy larger assets.
Schneider says now is the right time to do this public offering because the music industry appears to be entering a bull market thanks to streaming, similar to the one it experienced when the CD was introduced back in the 1980s and 1990s.
“We think this one will dwarf what happened with the CD,” Schneider says. But music fans who are investors have no way to participate because the three major companies are themselves not publicly traded, with both Sony Music Entertainment and Universal Music Group part of larger publicly-traded companies, Sony Corp. and Vivendi, respectively, while the Warner Music Group only has publicly-traded bonds.
Yet, thanks to their participation in buying publishing assets, many institutional investors are familiar with music assets. “Music is an asset class that investors are interested in and understand,” Schneider says.
This is not the first time the music industry has become involved in securitization. Back in the 1990s, Bowie Bonds were issued against music publishing catalogs from the likes of David Bowie, James Brown, the Isley Brothers and Holland-Dozier-Holland, among others. Also, Continuum, an independent record label that has since gone out of business, was publicly traded.
During that time, some industry insiders speculated that a publishing catalog would make the perfect vehicle for a stock offering because they have a predictable income stream investors would appreciate. Yet that never occurred. But if the Royalty Flow gambit is successful, will it serve as the catalyst for a new round of experimentation in the securitization of music assets? Time will tell.
