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Royalty-Backed Securities; The Future Of Asset-Backed Securities

Summary

Royalty-backed securities provide access to a growing section of intangible assets.

The history of royalty-backed securities has proved profitable for both the investor and the issuer.

There are many actionable ways to invest in royalty-backed securities, including investment firms and IPOs.

Intangible assets are becoming a larger part of business and personal assets, with growth from the 1990s to the 2000s of over 120%. Which garners the question, can the market benefit from this growth? This is where the royalty-backed security comes into play. Essentially, a royalty-backed security is a security, mostly stock or bond, backed by the future royalties of a certain intangible asset. These assets range from patents and copyrights to songs and even movies. The best historical example is Bowie Bonds, issued in 1997, were backed by the future royalties for all David Bowie songs from pre-1990 and received a AAA bond rating from Moody’s. The issuance made $55 million for Bowie and were all purchased by insurance companies and held for 10 years (maturity). Since 1997, royalty-backed securities have taken on new vehicles and have begun to garner investor interest.

            The market for royalty-backed securities is beginning to establish a foothold in traditional financial markets and offer investors to capture future earnings of certain intangibles as well as offer artists and patent holders to receive cash to fund future projects. Firms like Oberland Capital have popped up as private investment firm that invests exclusively in royalty-backed securities. Oberland Capital focuses on the healthcare industry and royalty backed securities from healthcare related patents and copyrights. The market for royalty-backed securities, however, extends past bonds and is beginning to extend into equity as well. Eminem made national headlines when a start-up called Royalty Flow filed for an IPO in September of 2017 with the goal of investing in as much as 25% of Eminem’s future royalties with the goal of investing in further royalties. It is the publicly filed company offering exposure to investors from the music industry. It is not the first company to focus solely on royalties with Chicken Soup for the Soul (CSSE) already publicly trading on NASDAQ.

            The question remains, however, why invest in royalty-backed securities? While this security is rather new, it has multiple benefits. First, it allows investors to reap the benefits from previously untouched markets such as music and other intellectual property. Second, it is widely believed that royalty-backed securities appreciate more than most asset classes. Lastly, it can provide tax benefits to both the issuer and investor based on the jurisdiction and terms of the security. The reason the market isn’t flooded with these securities is the legal concerns surrounding them. Most originating artists and companies are scared away by the legal and financial complexity that goes into these securities. With more and more musicians, companies and other entities entering this market, it is only a matter of time before royalty-backed securities become commonplace.