How to Earn Dividends from the Music of One of Rolling Stone's "Top 100 Artists of All-Time"

A Letter from Matt Smith, Chairman of Royalty Flow


Dear Potential Shareholder,

In the coming days, you’ll be able to participate in the IPO of an exciting new company called Royalty Flow.

Royalty Flow is a company that will acquire and manage royalty interests in media assets. We intend to pay our shareholders dividends based on the royalty income collected.

The Bass Brothers and Eminem
 

Our first acquisition is the FBT producer royalties from Eminem’s recording catalog from 1999-2013. (FBT stands for Funky Bass Team, which is the name of Jeff and Mark Bass' production company.)

Imagine your investment benefiting every time someone streams an Eminem song, downloads an album, or buys a CD of his music. And even though Eminem hasn’t released an album since 2013, the catalog’s revenue grew 43% last year. 

That's the thing... royalties from intellectual property are one of the most interesting income investments around. You buy or create an asset once and then get paid every time it's used. 

For reasons I’ll explain in a moment, we believe this catalog is set up to benefit greatly from the macro trends in the music industry.  

The Beginning of a Bull Market in Music?

I’m not sure if you’re one of Spotify’s 60 million paid subscribers or one of Apple Music’s 30 million subscribers… but if you are, you’ve witnessed the beginning of the music industry’s transformation. Frankly, we believe that the music industry is in the early stages of a bull market that hasn’t been seen since the invention of CDs.

And that’s not just us talking our book, Goldman Sachs believes that paid streaming revenue will grow by 833% by 2030.

 Source: Yang, Lisa. Goldman Sachs Global Investment Research

And we expect that the Eminem catalog will benefit from the growth of streaming. In fact, Eminem is the 12th most streamed artist in 2017 to date even though he hasn’t released an album in more than 4 years. So far this year:

  • Eminem has sold more songs than the Beatles.
  • Eminem has had more streams than Beyonce and Adele.
  • And he’s sold more albums than Led Zeppelin, Prince, and The Rolling Stones. 

Please read this letter carefully… because I’ve outlined the details on how you can participate in this historic event. Soon, you’ll be able to buy shares and potentially collect dividends based on the royalties from Eminem’s catalog.

What is Royalty Flow and How Can You Benefit?

We’ve created a new company called Royalty Flow that plans to acquire royalty interests in world-class media assets. We’re using Regulation A+ of the JOBS Act to raise capital for this purpose, so that any investor can participate in this initial public offering. 

This is a unique opportunity for investors to earn dividends from one of the most iconic assets in the world.

As operators of the online exchange for music royalties, we believe that these assets, with a strong track record of royalty income, are undervalued right now—and present an opportunity for investors like you.

I’m going to explain why we believe media royalties are undervalued today. I’ll share how you can be one of the first investors in this exciting new opportunity. And of course, I’ll tell you all about the first asset that Royalty Flow will buy.

Let's start there…

Why Are We So Excited about the Eminem Catalog?

  

The first acquisition that Royalty Flow will make is a passive interest in the FBT producer royalties from Eminem's body of work between 1999 and 2013. For us, the opportunity to acquire a piece of an iconic artist's catalog is an opportunity too good to pass up. 

The total revenue earned by this catalog grew 43% from 2015 to 2016, and that growth was driven by streaming.  

In a moment, I’ll explain more about these music industry macro trends and how we could benefit.  

Right now, I’d like to share some of the reasons we’re delighted to have this world-class catalog as part of Royalty Flow’s IPO:

  • Eminem was named “Billboard's Artist of the Decade” for 2000–2010.
  • He's been nominated for 43 Grammy Awards and won 15, including six for Best Rap Album.
  • He won an Oscar for Best Original Song with “Lose Yourself.”
  • He was ranked by Rolling Stone and VH1 as one of the 100 Greatest Artists of all time.
  • So far in 2017, Eminem is the 12th most streamed artist in the world. And he hasn't released an album in 4 years.
The Billboard 200 ranks the most popular albums each week by sales and streaming. Eminem has 4 albums on this chart. The Beatles have 3, and Michael Jackson has 2.
  • Eminem is one of the best-selling artists of all time, with 10 No. 1 albums and five No. 1 singles.
  • He is the second best-selling male artist of the Nielsen SoundScan era.
  • He is the best-selling hip-hop artist ever.
  • Globally, he has sold more than 172 million albums.
  • And the ultimate sign of a great artist: long-term relevance. This catalog has four albums currently charting on the Billboard 200. One album, Curtain Call, was named the longest-charting hip-hop album of all time by Billboard.

This Catalog Includes Royalties From:

  1. All of Eminem’s albums from 1999’s Slim Shady LP up to and including 2013’s Marshall Mathers LP 2.
  2. Eminem’s side projects, including works with Jay-Z, Akon, Tupac, 50 Cent, and others.
  3. All of Eminem's music videos from the work he released from 1999–2013.

Financial Highlights of this Catalog

It’s not surprising that a catalog made up of all the musical works of a major artist like Eminem would be lucrative, but here are a few important financial details:

  • The catalog’s royalties grew by 43% from 2015 to 2016, even though Eminem hasn’t released a new album since 2013.
  • Great catalogs should be generating higher and higher levels of royalty income as streaming subscriptions increase. This catalog certainly is.
  • The catalog is very diversified—the top 20 songs generate only 27% of the catalog's total earnings. Unlike many assets, this catalog doesn’t rely on one massive hit to make money. 

In the coming days, you’ll have the opportunity to invest in this catalog via Royalty Flow’s IPO. Early investors will be able to get into this company at the ground floor. Before we dive into our growth strategy, you need to understand more about the Bass brothers...

The Story of FBT and Eminem

One night in 1992, Mark Bass, who together with his brother Jeff Bass, make up the Funky Bass Team (FBT Productions), discovered a young rapper freestyling on a local radio show. Impressed by this rapper's talent and potential, the brothers signed the young artist—soon to be known to the world as Eminem—and in 1996 released his first album Infinite to critical dismay... the album sold less than 100 copies.

Mark and Jeff continued to nurture and support Eminem as he developed the alter ego "Slim Shady." Both exceptional musicians, they crafted catchy tracks without using samples (a common practice in the hip-hop world), and instead played all the instruments themselves. Once they released his breakthrough album the Slim Shady EP in 1997, the brothers continued to work with Eminem, co-writing and/or producing most of his acclaimed recordings and hits through the release of Curtain Call. They've won several Grammys and an Academy Award for Best Original Song with “Lose Yourself” from the film 8 Mile.

And then FBT Productions paved the way for a groundbreaking 9th Circuit Court of Appeals decision in 2011, affirming that payments from digital exploitation of the Eminem recordings were subject to the much higher 50/50 licensing provision in their contract with Universal Music Group. Now, for the first time, a portion of FBT's ongoing royalty interest from the entire catalog of Eminem's recordings is being made available to investors.

Key Financial Facts on the FBT Eminem Royalties:

  • Streaming royalties from the catalog grew 76% from 2015 to 2016.
  • The catalog has generated more than $80 million in royalties since 1999.
  • Royalty Flow has the option to buy up to 25% of the FBT royalties. Shareholders can earn dividends based on the future performance of the Eminem royalties.

Before we dive into the detailed financials of the catalog, let's talk more about music royalties...

Why You Should Consider Music Royalties as Part of Your Portfolio

Why royalties are one of the best alternative assets:

You probably know that alternative investments can be an important part of a broader portfolio. Alternative investments offer the potential of low correlation to traditional investments like stocks and bonds. They often have the potential to generate income as well.  

When you add alternative investments to a portfolio you get a significant diversification benefit over time. The goal and result can often be better risk-adjusted returns.

But typically when investors seek out alternative investments they have very few options and those almost never include what we think are the most direct alternative investments available: IP-derived royalty income.

Let me explain how these assets work. Then, I think you’ll agree with me that these are interesting and exciting assets.

Focusing on music royalties, here’s how rightsholders get paid.

The owners of royalty rights are paid based on: streams, downloads, physical album sales, and other usages. In essence, consumption of music drives royalty payments.

And music consumption doesn’t necessarily change when interest rates go up or when stock market sentiment turns bearish, the way other investments can.

In addition, royalties:

  • can earn consistent cash flow
  • are long-term assets (royalties are paid for the life of the artist + 70 years)
  • have relative price, or NAV (Net Asset Value), stability
  • have the potential for capital appreciation—especially now

Why Invest in Music Royalties Now

We believe that now is a good time to invest in music royalties because the music industry may be in the beginning of a major bull market. Our hypothesis is that music assets are climbing out of a long, brutal bear market. 

For the last 15 years, we believe the industry has been the victim of:

  • piracy
  • disaggregation of music from physical albums to digital singles
  • mispricing / undervaluation due to lack of transparency

And you can see the results of that bear market in the chart below. But notice one thing... the industry started growing again in 2015.

Source: IFPI/Midia Research

At Royalty Flow, we're confident we’ve only seen the start of that recovery and we’re not the only ones. 

The reason? The rise of digital streaming.

Subscriptions to digital streaming services like Spotify, Apple Music and Pandora have been a game changer for the industry.

Streaming Is Growing Faster Than Anyone Expected

Music streaming generated approximately $3.9 billion in 2016, according to trade group IFPI. In December 2016, Goldman Sachs projected streaming revenues to grow to about $14.1 billion by 2030.

But, streaming is growing faster than anyone expected.  

According to an August 2, 2017 Business Insider analysis, “[Spotify] managed to increase its user growth rate as its subscriber base grew. The music streaming service added 10 million subscriber additions in roughly four months, faster than the approximate six months it took to go from 40 million subscribers to 50 million.”

With facts like these, just eight months after Goldman Sachs estimated streaming would get to $14.1 billion by 2030, they revised the forecast. 

In fact, they doubled it to $28 billion.

We believe, because of streaming, music is about to enter a long bull market that will cause the tide to rise for rightsholders … and especially for owners of trophy assets like the Eminem royalties.

Here's Why the Industry Growth in 2015 and 2016 Is Just the Beginning...

Every single smartphone owner has a portable music player in their pocket. And streaming is the most convenient and inexpensive way for consumers to get all the music they want. For the price of just one CD per month, Spotify and Apple Music users can stream millions of different songs. The mere convenience of streaming from your phone makes all the difference.

  • Music industry trade group IFPI reported 112 million paying subscribers to music streaming services at the end of 2016. That’s about 3% of the 4 billion smartphones worldwide.  
  • Goldman Sachs analyst Lisa Yang predicts 14% of global smartphone users will subscribe to music services by 2030, raising her previous estimate of 9%.


And the Future Goes beyond the Smartphone

When I was a kid, I wanted a stereo in my room. Today’s kids want a smart speaker like the Alexa—powered Amazon Echo. My 10 & 12-year-old kids use it every day to play their favorite music. I have 4 echo devices in my home right now and I can tell you, they’re amazing. 

These devices aren’t just popular with my family. If Goldman Sachs is right, the rise of smart speakers and connected cars could contribute up to $8 billion in additional revenue to the music industry by 2030. 

Amazon’s Echo speaker line is expected to ship 10 million units in 2017. A similar device from Google called Google Home is growing in popularity, and Apple will release the HomePod this December.

Amazon Echo is the market leader but Google and Apple have competing products.


Better Technology Means More Data and Transparency for Asset Owners

Technology is providing data and transparency never previously available in the music business. Collecting, aggregating and analyzing data has become much easier in the digital world, and royalty rightsholders are reaping the benefits. 

Better data means more accurate royalty collection and distribution, as well as easier analysis of music as an asset for investors. 

And better data means that the ads in ad-supported music will have better targeting, become more effective, and potentially generate more revenue. So even consumers that don't pay for music streaming services will generate revenue for music rightsholders through advertising. Goldman Sachs expects ad-supported revenue to contribute $6.1 billion to the music industry per year by 2030. That’s up more than 450% from the $1.1 billion it generates today.

Digital Radio Pays Royalties to Artists, Producers, and Record Labels

This might surprise you, but before digital radio services like SiriusXM and Pandora, artists and labels didn’t make a cent from radio plays. That’s right, if your music was played in the US on traditional AM/FM radio and your rights were tied to the sound recording copyright, you got nothing for the use of your IP.

But it’s totally different in digital. As US consumers transition away from traditional radio, we believe the billions of dollars in advertising revenue that currently flow to local radio will follow, much like how the advertising dollars shifted from the Yellow Pages to Google in the last decade.  

And in the digital world, these ad dollars will produce royalty income for rightsholders which include the record labels, the publishers, the artists, and, of course, shareholders of Royalty Flow.

The Impact of Streaming on Older Music Catalogs

Giving consumers instant access to vast libraries of music makes it easy to listen to music from decades ago. And that’s caused some older catalogs to experience a revival.  

Digitizing the industry has helped recording artists and other rightsholders unlock the true value of their royalty streams by increasing consumer’s access to music and providing much more transparency than we have ever had before. Industry insiders expect this trend to continue.

In 2016, the Eminem catalog's income from streaming grew by 76% over the previous calendar year—accounting for 46% of the total royalty earnings (or 59% if you remove an adjustment made in video).

We find ourselves at a pivotal time for investing in media royalties as an asset class. The increasing importance of intellectual property in the global economy, the music industry’s projected growth and potential for cash flows that aren't necessarily correlated to traditional stock and bond markets, make media royalties an incredible alternative asset class—one that we believe many investors should consider for their portfolios.

Revenue from streaming services is expected to grow more than 8x—from $3.9 billion to $34 billion—between 2016 and 2030.We expect much of that revenue to be passed on to the rightsholders through royalty payments. 

Given the current trends, we believe that investing in music royalties in 2017 is an opportunity to invest at the start of a boom and experience massive appreciation while collecting royalty income along the way.

How Do Royalty Owners Get Paid?

Let me explain how these assets work. Then, I think you’ll agree with me that these are interesting and exciting assets.

Focusing on music royalties, let’s take a look at how rights holders get paid.

The owners of royalty rights are paid based on streams, downloads, physical album sales, and other usages. In essence, consumption of music drives royalty payments.

And music consumption doesn’t necessarily change when interest rates go up or when stock market sentiment turns bearish to the extent other investments can. Harold Vogel, the senior entertainment industry analyst at Merrill Lynch said: "The secular influence of new sound-carrier format introductions such as cassettes in 1973, compact discs in 1983, and digital downloading and streaming services have been far more important than the business cycle in affecting demand." 

Now that we’ve covered the benefits of owning music royalties, let’s talk about how Royalty Flow will create value for you, the IPO investor.

How Royalty Flow Will Create Value for Shareholders

“The best business is a royalty on the growth of others, requiring very little capital itself.” - Warren Buffett

By this point, I hope you understand that we believe the music industry is poised to experience a historic recovery and bull market. We expect, but can’t guarantee, that high-quality royalty assets like the Eminem royalties will benefit greatly from the coming bull market in music.

But I wanted to take a few minutes to talk about how you can benefit from investing in Royalty Flow. Royalty Flow is a specialty financing company that acquires and manages media royalty assets.

There are 3 things you should know about Royalty Flow.

  1. We’ll focus on paying dividends and we intend to grow the dividend over time.
  2. We’ll acquire assets that we believe have the potential for capital appreciation. We’re looking for boats that will rise with the industry tide.
  3. And we’re doing this in a capital efficient structure that should have a lower cost base which allows us to reward shareholders.

Let’s consider each of these points in order...

Focus on Paying and Growing the Dividend

We believe that companies that consistently pay and grow their dividends show a deep commitment to their shareholders. That’s why we intend to consistently pay and grow our dividend.

“Dividends have been a major component of the stock market’s overall total returns throughout history. Dividends have contributed anywhere from 25% to 75% of the market’s overall total return over the past seven decades” - Brian Bollinger

So we intend to pay dividends to put money in your pocket and grow those dividends over time.

We intend to pay our first dividend next year and intend to grow this dividend each year as we acquire more income-producing royalty assets.

The Potential for Capital Appreciation

We believe that we’re only at the beginning of the music industry’s rebirth. As streaming becomes more popular, we expect to see the value of music royalty assets increase.

We could be wrong, but we expect that iconic assets like Eminem’s royalties will be worth more in the future than they are currently.

Royalty Businesses are Capital Efficient

The nice thing about royalty businesses is that they are generally very capital efficient. Capital efficiency is the measure of how much a business has to reinvest in order to maintain or grow revenue. So in highly capital efficient businesses, as sales grow, the amount of capital that must be reinvested doesn’t grow or grows at a slower rate.

So with a capital efficient business, as sales and profits grow, capital investments don’t.

We intend to be a very capital efficient business. Our major expenses will likely be listing on a public exchange and professional fees. As we acquire royalty streams, we believe we’ll collect the royalties without having to make substantial ongoing capital expenditures.

We expect that will allow us to reward shareholders.

Shareholder Liquidity

After the IPO closes, we intend to list Royalty Flow on the NASDAQ, the same national exchange where Facebook, Amazon, and other tech companies trade. If we cannot get listed on the NASDAQ to start, we'll be listed on the over the counter (OTC) markets until we uplist. Either way, after the IPO, we believe that shareholders will have liquidity.

As you know, we intend to start by acquiring the Eminem catalog but we intend to acquire additional royalty streams. Here's how we're going to think about new acquisitions...

The Four Pillars of Our Royalty Acquisitions and Operations

Our criteria for new royalty acquisitions include:

1. A Track Record of Royalty Income

The first thing we look at when making a royalty acquisition is: does the asset have a track record of earning royalty income? Royalty Flow does not plan on speculating on unproven artists or catalogs. We’re looking for assets with earnings history that we expect will generate substantial income in the future.

Our first acquisition, FBT’s Eminem catalog, has a long track record of earning royalties… and we believe that those earnings will continue.

2. Capital Appreciation Potential

We agree with Goldman Sachs when they say: "Streaming services are poised to drive a second and more profitable 'digital revolution' in music after more than a decade of value destruction from piracy and unbundling." With that in mind, when we evaluate potential royalty acquisitions, we’ll keep an eye towards the future and seek to buy assets that have high potential for capital appreciation.

Subscription streaming has transformed the music business and we expect that streaming will drive growth. In 2015, the industry grew for the first time in 15 years. We believe that we’re only in the first inning of the bull market for the music business. Therefore we believe that many of these assets have high potential for capital appreciation.

3. Passive Interests Only

We plan to acquire non-operating interests in great IP. Since we’re not acting as a record label or publisher, we expect it will keep our cost base lower and will allow us to reward shareholders. We’ll allow owners of great assets to take some money off the table but still maintain a substantial economic interest.  

That will allow us to acquire great assets that other players in the space can’t profitably buy because of their overhead. And frankly, as investors, you probably only care about generating great returns. We believe that  the best way to do that is to get as close to owning the underlying royalty asset as possible.  

Royalty Flow offers an option to owners of great assets that others can’t match and we’ll keep our interests aligned with the IP owners we partner with.

4. Established Operating Partners

Since Royalty Flow intends to only acquire passive interests in royalty streams, we must partner with excellent active operators.

We’re looking for operators of assets that have a track record of great stewardship. FBT has been an excellent steward of the Eminem royalties. They’ve demanded consistent earnings audits. They’ve unlocked additional value by vigorously protecting their rights against infringement. They’re a great operating partner for us.

But identifying great operating partners isn’t enough, we must also ensure that our interests are aligned with the operators. We plan to do this by creating shared incentives and putting equal treatment clauses in our agreements.

 

These four criteria will drive our operating strategy going forward.

Since our first pillar is a track record of royalty earnings, let's talk about the royalty payment history of the FBT Eminem catalog.

The Eminem Royalties Grew 43% Last Year, Here’s What Else You Should Consider…

We have the option to buy either 15% of the royalties or 25% of the royalties.

The purchase price for 15% is $9.75 million. Here’s what 15% of this catalog has earned over the last seven years (audited):


The purchase price for 25% is $18.75 million. Here’s what 25% of this catalog has earned over the last seven years:


Here are the average earnings per year over a few different time periods for this catalog (audited):


Keep in mind that historical results are not indicative of future performance. Royalty Flow is not entitled to any of the historical payments.

Full Catalog Earnings by Year


Comparable Companies

Part of the reason for starting Royalty Flow was because, as an investor, I recognized how valuable royalty companies and/or royalty income streams can be.  The best part about royalty deals is that after you acquire the royalty, you don’t have to spend any more money on that royalty.

Over the last few years, publicly traded royalty businesses have popped up in a number of industries. And the results have been excellent for shareholders:


As you can see, investors who acquired IPO shares in these royalty companies did extraordinarily well.

Of course, there is no guarantee that investors in Royalty Flow will achieve similar returns.

Royalty Flow intends to use this tried and true model and simply applies it to a new industry... an industry that we believe is in the early stage of recovery after more than a decade of bad news.

What to Do Next If You’re Interested

 

In the coming days, you’ll be able to participate in the Royalty Flow IPO.

To recap, this is the opportunity to get in early with a company that plans to acquire royalties from the world-class Eminem catalog. As an IPO investor, we expect you’ll be able to earn dividends based on the royalties collected.

In addition to the Eminem catalog, we intend to acquire other high-quality royalty streams. As an early investor, you’ll have the potential to benefit from the dividends derived from those future acquisitions. And if we’re right that the music industry is in the early stages of a bull market that hasn’t been seen since the invention of CDs, then the value of the assets we acquire may increase substantially.

 

Here Are the Terms of the Royalty Flow IPO

The summary below highlights key terms of the Royalty Flow IPO. It does not contain all of the information that may be important to you. Please read our SEC Form 1-A filing for full details.

Shares in Royalty Flow are priced at $7.50 per share.

We’re seeking to raise a minimum of $11,000,000 and a maximum of $50,000,000.

The minimum investment amount is $2,250. (300 shares)

The IPO shares are Class A common stock. Each share has 1 vote. Royalty Exchange owns all of the Class B common stock, which has 10 votes per share.

Dividend Policy: We intend to pay a growing and sustainable cash dividend derived from available cash received from the royalty interests we acquire.

Use of Proceeds: We intend to use $9,750,000 of the proceeds from this IPO to acquire the 15% Option on the Eminem royalties if the net proceeds from the IPO are less than $25,000,000. If the net proceeds from the IPO are $25,000,000 or more, we intend instead to use $18,750,000 to acquire the 25% interest.

We intend to use any remaining net proceeds from this IPO for general corporate purposes, which may include working capital, general and administrative matters, and the acquisition of additional Royalty Interests.


So if you’d like to participate in this IPO, then please fill out the form below. We’re asking for some basic information that will help us plan and allocate shares. We expect this offering to fill quickly once it is qualified by the SEC so please do not delay.

Once the offering is filled, we’ll close access and you may never be able to buy shares at the IPO price.

Disclaimer:

No money or other consideration is being solicited for our Regulation A+ offering at this time and if sent in to Royalty Flow will not be accepted. No offer to buy securities in a Regulation A+ offering of Royalty Flow can be accepted and no part of the purchase price can be received until Royalty Flow’s offering statement is qualified with the SEC. Any such offer to buy securities may be withdrawn or revoked, without obligation or commitment of any kind, at any time before notice of its acceptance given after the qualification date. Any indication of interest in Royalty Flow’s offering involves no obligation or commitment of any kind.

The securities to be offered will be highly speculative.  Investing in shares of Royalty Flow will involve significant risks.  Investment will be suitable only for persons who can afford to lose their entire investment.  Furthermore, investors must understand that such investment could be illiquid for an indefinite period of time.  No public market currently exists for the securities, and if a public market develops following the anticipated offering, it may not continue. 

This contains forward-looking statements. Forward-looking statements are subject to risks, uncertainties and assumptions and are identified by words such as "expects," "estimates," "projects," "anticipates," "believes," "could," and other similar words. All statements addressing events or developments that Royalty Flow expects or anticipates will occur in the future, including but not limited to, the success of its crowdfunding campaign, listing on a securities exchange and development of a market for its securities, and its business strategy, including acquiring future royalties. Because they are forward-looking, they should be evaluated in light of important risk factors and uncertainties, including without limitation: Royalty Flow’s ability to execute its equity crowdfunding and future growth strategies, the state of the music industry and payment under royalty interests, and the future popularity of Eminem. Should one or more of these risks or uncertainties materialize, or should any of the Royalty Flow’s underlying assumptions prove incorrect, actual results may vary materially from those currently anticipated. In addition, undue reliance should not be placed on the Royalty Flow’s forward-looking statements. Except as required by law, Royalty Flow disclaims any obligation to update or publicly announce any revisions to any of the forward-looking statements contained here. View our SEC Form 1-A filing.