Royalty Exchange

Summary

Royalty Exchange is an online auction platform for royalty rights (primarily related to music). Terms and details vary considerably from auction to auction, and the complexity and nuances of IP rights transactions likely puts this platform well outside the comfort zone of many investors, especially those without direct experience in IP rights sales.

  • Website: https://www.royaltyexchange.com
  • Investment Types: Royalty Revenue
  • Security Types: Rights Contract
  • Sectors: Entertainment, Music, and Royalties
  • Minimum Investment:
  • Open to all investors

Pros

  • Open to non-accredited investors
  • Fluctuating but regular cash flow
  • Very low correlation with other asset classes
  • Transparent auction process
  • Some rights include multiple income streams

Cons

  • Some auctions have high minimum bids ($100K or more)
  • Inherent uncertainty in future cash flow from royalties
  • Rights transactions can be incredibly complex

Royalty Exchange logo

Overview

Founded in North Carolina in 2011 as a venture-backed startup, Royalty Exchange was sold to new ownership based out of Denver in 2015. Their public auction model stands out among alternative investment platforms.

I’ve worked in and around book publishing for almost 20 years, and know firsthand that most commercial rights sales in the media business remain anything but transparent, so Royalty Exchange deserves kudos for working to bring more visibility and opportunity to both rights holders and buyers.

Royalty Exchange positions itself as the largest access point into a growing market for investments in a market otherwise uncorrelated with traditional assets.

Types of investments Royalty Exchange offers

While specifics can vary considerably from auction to auction, you’re investing in future income stream derived from royalty payments, primarily for music. For example, some auctions are for the “performance” rights associated with a catalog of songs such as radio, satellite radio, or streaming on Pandora.

Other rights are from “synchronization” such as every time one of the songs is played on a TV show, in a movie, or on a commercial or “digital synch” on YouTube. Other royalties are derived from “mechanical” sales, which would be the physical sale of a CD or vinyl album or on-demand streaming service (like Spotify or Pandora).

A royalty is collected by a performance society (eg ASCAP or BMI) and those payments are distributed out to the rights holders.

Some sales are for permanent royalties, and represent a percentage of a catalogue being sold. Other sales are temporary, serve as an advance for the artist, and only give the purchaser the rights to revenues for a certain number of years, like the next 10 years for example, before reverting back to the original rightsholder.

Royalty Exchange also allows for multiple bidders to purchase shares in a catalogue, especially if they are larger than the typical sale the auction platform supports.

Rights transactions can be incredibly complex, and investors should make sure to have a firm understanding of exactly what they’re buying, including for how long.

What do you get when investing with Royalty Exchange?

Royalty investments are contractual claims on future royalty payments owed to a copyright holder (who has chosen to license out some or all of their future claim on those payments).

If the auction is for a partial or reduced percentage of royalty rights, the buyer will only have rights to the pro rata share purchased.

Royalty Exchange fee structure

Royalty Exchange charges a $500 buyer fee to investors.

Buyers may elect to become an “All Access Investor” for $4,500 to waive the $500 fee, in addition to receiving other additional benefits with respect to bidding and additional information-access.

Royalty Exchange collects a fee from the rights sellers upon completion of a successful auction. Details about any additional fees are disclosed within the auction information (for example, fees to set up an account with the relevant rights society like BMI).

Potential returns and cashflow

Royalty payments are typically made quarterly or semi-annually either directly from an entity like ASCAP or BMI, or via Royalty Exchange itself. Returns vary greatly depending on the specific catalog. Older royalty streams tend to be steady over time, with some opportunity for additional upside (for example, if a song in a catalog is chosen for use in a popular movie, commercial, or TV show). Most copyright extends for the lifetime of the author plus 70 years, so many of the royalty streams have the potential to extend quite far into the future.

Other royalties may be offered for only a limited amount of time, such as 10 years. The specific listings will specify how long the rights are offered for.

The site itself offers valuation guidelines underneath the individual auctions. They highlight for example the “Dollar Age” of the portfolio (older is better since it implies stability and staying power), the relative profile of certain artists (higher profile is obviously better), and the mix of income streams possible (sales of music, digital streaming, plays on YouTube, and licensing to movies or television)

The site also highlights similar closed auctions to give new investors a sense for what has sold on before, at what prices and multiples of previous annual income.

In some cases the auction is subject to a ‘match’ from a publisher, meaning even after a winning bid is found, the third party may exercise its “matching right” and keep the future royalties for itself.

The site offers a “theoretical IRR” listing next to the auction price that changes as current auction prices change. Investors should understand that the “theoretical” is completely based on assumptions about extrapolated, normalized earnings, and should not be relied upon. As always with any investment, “past performance is not a predictor of future returns.” When a potential bidder clicks on the “theoretical IRR” link, however, the site does provide quite a bit of granular detail about past earnings of the royalties up for sale.

Breadth of offerings on Royalty Exchange

Royalty Exchange self-reports 535 transactions totaling $50 million in value, since its relaunch in 2016. The exchange notes that 255 separate individuals or institutional investors won those auctions, with thousands more participating in auctions, but not buying.

The site touts its usefulness to artists who otherwise could not access traditional big-name funding sources. The Exchange says 75% of its royalty owners are individual songwriters not widely known to the public.

As a result, you should expect to not recognize most names/catalogues on offer.

A little more than half of the catalogues sold for $20,000 or less. A majority (70%) were for public performance royalties rather than publishing catalogues.

As of this writing, the website offered 5 auctions expiring within the week, 4 from hip hop or R&B artists, and one from Ben & Jerry’s Ice Cream music (!). Live auction prices ranged from a low of $3,650 to a high of $630,000, with some time left on each of the auctions.

Historically, Royalty Exchange has facilitated sales of song royalties from well-known artists including Dr. Dre, Santana, Barry White, The Doobie Brothers, The Grateful Dead, and even Taylor Swift.

Regulatory framework and due diligence expectations

Royalty Exchange performs an in-depth analysis of each catalog before opening for auction.

The amount of data on past royalties paid, provided by the Exchange, offers a significant amount of information for prospective buyers.

Royalty Exchange also says that it verifies the legitimacy and legality of its sales in advance of listing royalties for auction.

That said, they also advertise to rights sellers that they “have a team of attorneys, accountants, and analysts that can make these deals happen fast”, closing in less than 30 days, so prospective investors should keep that in mind as they perform their own due diligence in reviewing an auction.



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