Take a look at the Rochester Hills home being sold by rap star Eminem.
Elissa Robinson/DFP
Daring to dream big is part of the deal these days when it comes to pitching a piece of the action on everything from Eminem to Bitcoin.
But before you start seeing dollar signs, know the big risks associated with buzzworthy deals. After all, everyone’s looking for the next cutting-edge thing but don’t lose your money in the moment.
Royalty Flow is a new enterprise that’s aiming to “acquire and manage royalty interests in media assets,” according to its website.
We’re not looking at anything near the frenzy of Bitcoin. But Royalty Flow’s “mini-IPO” is building buzz with talk of acquiring royalties from Eminem’s recording catalog from 1999-2013 — including the iconic Marshall Mathers LP released in 2000.
“Because of streaming, we believe that the music industry is on the cusp of a bull market that hasn’t been seen since the invention of CDs,” states Royalty Flow, which is a subsidiary of Royalty Exchange, an online marketplace for music and media royalties.
Finding a hot idea, such as digital music streaming or virtual currency, seems appealing during the height of a bull market as the Dow Jones Industrial Average trades well above 22,000.
What hip-hop investors need to know is that the Royalty Flow deal isn’t a typical stock offering. It’s an SEC-registered Regulation A+ offering, which went into effect in 2015 to offer a streamlined process that enables upstarts to raise up to $50 million from investors.
The Royalty Flow deal isn’t a Kickstarter project. But it’s not a stock offering that will undergo more rigorous regulations at the state or federal level, either.
Offering documents will be reviewed by the Securities and Exchange Commission before the company is allowed to sell securities.
Royalty Flow’s offering would begin after the SEC qualifies the filing, which the company expects will happen later in October.
The parent company, Royal Exchange, would own a minimum of 20% of Royalty Flow. But ordinary investors, like you and me, could very much be part of the deal. The company said the minimum investment is $2,250 for 150 shares or $15 a share.
Fans who are interested can go to royaltyipo.com. No money is being solicited now.
The company’s fund-raising target is $11 million to $25 million.
Not surprisingly, it helps if a “mini-IPO” has popular appeal, such as hit songs. On the upside, more superstars could come on board at some point, too.
The latest move brings back memories of the old “Bowie Bonds.” David Bowie raised $55 million in 1997 by turning to Wall Street to roll out a bond deal involving royalties from his back catalog.
But Eminem is not involved in this offering and has no connection to Royalty Flow, according to a statement that Dennis Dennehy, Eminem’s spokesperson, provided to NPR.
But there are Eminem-specific risks in the Royalty Flow campaign.
Something out there could damage Eminem’s reputation — and cut into the cash generated through royalties.
What happens if his music is no longer popular? The cash flow can be highly unpredictable, according to Nanalyze.com, an investment forum.
Kat Liu, research analyst at the Chicago investment firm IPOX Schuster, said the risks to investors are higher with Regulation A+ offerings because the mini-IPOs do not have to comply with state blue sky laws that regulate the offering and sale of securities to protect the public from fraud.
As for specific risks associated with Royalty Flow, Liu noted that the company will need to acquire more catalog and media assets in addition to Eminem’s catalog. Proceeds from the mini-IPO will be used to buy up to 25% of Eminem music royalty rights from producers Mark and Jeff Bass, the brothers who signed the rapper in 1995.
Shares are to be listed on a public stock exchange — possibly NASDAQ or an over-the-counter exchange.
But Liu said the investment itself is likely to be valued more on any future potential dividend payout, not stock growth.
Experts in the Regulation A+ space note that you’re not looking at any short-term pop in value, as you might with a typical IPO.
Sallie Jian, vice president for SeedInvest in New York, said investors may need to wait five to 10 years to see shares climb in value.
The potential for making more money exists much later when the company might go through the process for a traditional IPO, repurchases shares or take part in a merger or acquisition, she said.
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Big dreams, of course, aren’t limited to the royalties of rappers. We’re hearing plenty of buzz about Bitcoin and ICOs — or initial coin offerings — too.
But the Financial Industry Regulatory Authority has issued an alert about the risk of investing in a company trying to raise capital to create and distribute virtual coins. Some ICO pitches may be from unlicensed individuals, according to the SEC.
The Bitcoin buzz is huge — so huge that Yale economics professor Robert J. Shiller, who spoke at the University of Michigan Ross School of Business on Sept. 14, told me then that he’d say Bitcoin was in a speculative bubble.
Bitcoin is a digital currency, created in 2009, that can be used to buy goods or services with relative anonymity and without the need for a central authority, such as a bank or government.
Bitcoin has skyrocketed in value from $1,000 in early 2017 to around $4,165 in late September.
But Shiller, a Nobel Prize winning economist, is worth listening to since he successfully warned of the dot-com stock bubble in his book “Irrational Exuberance,” published in March 2000. Shiller is also credited with being able to call the housing bubble well in advance.
Shiller wrote in his column in the New York Times in September that conversations in the financial universe about Bitcoin have gone viral twice, once in 2013, and again this year. But Bitcoin’s total market value is less than $100 billion, so Shiller wrote that potential problems in the virtual coin market aren’t likely to impact the vastly larger stock market.
But realistically, we’re talking about digital angst here, new technologies and a wonderful opportunity for con artists to dupe investors with some virtual currency offerings.
Buzz is one thing — but it’s never enough of a reason to part with your money.
Contact Susan Tompor: stompor@freepress.com. Follow Susan on Twitter @Tompor.
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