Music Benefactors, an SEC-registered investment platform that assists recording artists in raising capital for their projects, is in large part a reaction to dysfunctions in the established system of financing in that industry, according to Matt Lutz, its founder and CEO.
“The big labels aren’t into the development of talent any more,” Lutz said in a recent interview, so there is “no way to let an independent artist get funding” except by working to create an alternative system.
Music Benefactors received a fair amount of attention recently when it moved into the country music space. Karen Waldrup entrusted this platform with her project, Somebody’s Got to be First, and in a few weeks it was 42% funded against the maximum goal, 110% against the minimum goal.
The platform lets Waldrup and other artists raise capital without abandoning ownership of their master recordings or the copyrights.
What is more: the system lets fans and investors participate in the process. Opening the funding to the world of fans is very important, Lutz said. “It brings friendly capital into the music business.”
There is a deep emotional attachment. Fans have the chance to say “I helped create this.”
With regard to the Waldrup project, fans could purchase shares for as little as $50 for a block of 50 shares.
Fans committing $200 or more got access to a password-protected area in her website and its exclusive content. One thousand or more also got the fan a collectible autographed canvas print.
From an investors’ point of view, at any rate, the equity in the project is more important than the exclusive website content or autograph.
All money raised is held by a third-party escrow agent, then wired to the company or artist when the offering closes.
A nine-step program
This is how it works:
- Since securities are being sold to the public, Music Benefactors conducts due diligence and bad actors checks to protect all parties against financial fraud.
- Music Benefactors then assists in the completion of the necessary offering documents.
- Minimum and maximum goals are set.
- Offerings are marketed — there are a lot of ways this can be done, including Facebook, TikTok, Instagram, Twitter, etc., as well as musical and financial publications.
- The offering is listed on the Music Benefactors platform.
- The offering opens to the public — shares at last are sold.
- Money is raised, as noted above, with a third party qualified escrow agent.
- Finally, 21 days or more after the offering opens it closes, the minimum has been reached, and funds are wired to the company or artist.
The platform works with the assistance of Exactuals, the leader in royalty and payment distribution. Exactuals’ software allows thousands of investors to receive their dividend payments simply.
The music royalty bond
Another element in Music Benefactor’s re-working of music industry finance is the Music Royalty Bond (MRB).
The underlying idea here is at least as old as the “Bowie bonds,” much discussed in the final years of the last millennium. This was a bond issued by music legend David Bowie and backed by his royalty streams.
Bowie used the $55 million raised from that 1997 issuance to buy the rights to his music from his former manager. That purchase allowed him to generate an income stream to his bondholders.
Likewise with MRBs: fans and music-loving investors buy bonds issued by catalog owners. So the catalog owners have the friendly capital they need to compete with the major labels and music publishers.
This bond issuance is tax smart. The proceeds can generate as much money as would the outright sale of the catalog but, in contrast to the proceeds of a sale, this is not taxed as a capital gain.
The proceeds from the bond sale are used by an issuing entity to sign new artists, acquire new catalogs, create sub-labels or joint ventures, and to enable catalog owners to pull cash from the business.
Before Music Benefactors entered country music via Ms Waldrup, they were active with jam bands and hip-hop artists. An article on their work with jam bands was picked up by MusicRow, the Nashville music industry trade publication.
Lutz says that Waldrup’s manager then came to him, because the manager had read about an earlier offering in MusicRow, and thought the same system could help Waldrup.
You don’t have to be a weatherman to know….
The understanding of intellectual property in the music business, a source (or the sources) of continuing revenue for an artist or label, is sometimes clouded by the fact that there are two very different sorts of copyright involved, as Lutz explains: the publishing side is distinct from the recording side.
On the publishing side there are copyrights for the songs themselves, melody and lyrics: held by composers or publishers.
Separate from that there is the issue of the master recording. This is a specific recording of a song: think of Proud Mary, which has a master recording by Creedence Clearwater Revival and another by Ike and Tina Turner.
Publishers earn royalties every time the song is used by any outside party. In today’s context this means: royalties for every download of the song recorded by music artists; royalties for performances in person or broadcast; royalties for streams on streaming platforms.
The owners of copyrights to recordings, record labels or independent artists and the legal entities they create for this purpose, also generate revenues from multiple sources: sales of albums and digital downloads, royalties from streaming platforms and from the use of sound recordings in movies and on television.
An artist with a label generally receives a percentage of the label’s royalty revenue.
Music Benefactors isn’t the only agent of change on the financial side of the music business just now. Music is a complicated ecosystem and private equity will either make it more complicated in the years to come or will have some rationalizing/simplifying effect. Or, perhaps, it may accomplish something in both of those directions.
Among the PE shops interested: KKR and Shamrock Capital both stand out. KKR announced early this year the purchase of a majority stake in Ryan Tedder’s music catalog.
In November of last year, Shamrock made headlines when it bought a portfolio of Taylor Swift songs for $300 million.