Compact discs were replacing records when Jeff and Mark Bass took a chance on a young white rapper named Marshall Mathers. Eminem, as he’s known, blossomed into one of the world’s most popular musicians.
Now the brothers, who still own part of Eminem’s catalog, want to cash in. They’ve agreed to sell up to 25 percent of their interest to Royalty Flow, which will buy the stake with money raised in what’s called a mini initial public offering, company executives said. They plan to file Monday with the U.S. Securities and Exchange Commission to sell shares to the public in a Regulatory A+ offering and will ultimately seek an exchange listing.
Music fans and investors have little opportunity to invest directly in the music business, where the biggest players are closely held or parts of larger corporations. Thanks to a 2012 law that made it easier for small businesses to raise money, investors who believe the growth in streaming will make Eminem’s catalog more valuable will be able to buy a slice. Spotify Ltd. will be another opportunity, when it goes public.
“If you’re a fan and wanna bet on that artist, you’ve got some skin in the game,” said Joel Martin, a business partner of the Bass brothers. “It takes the average investor and puts them in a position they wouldn’t be in before.”
Royalty Flow is looking to raise $11 million to $50 million, founder Matt Smith and Chief Financial Officer Jeff Schneider said in an interview. The Bass brothers agreed to sell 15 percent of their interest and are in line to get the first $9.75 million from the stock sale, or $18.8 million if they commit to selling 25 percent. Any additional capital will go to the Denver-based company to buy more music rights and, eventually, pay dividends.
Music Auctioneer
Smith comes to the deal through his 2015 purchase of Royalty Exchange, which has held about 180 auctions of music rights. Smith saw an opportunity to sell music to a wide swath of investors after President Barack Obama signed the Jumpstart Our Business Startups Act in 2012 to help small companies raise money. So he created Royalty Flow.
A Tier 2 Regulation A+ offering, such as Royalty Flow’s, is like crowdfunding in that it lets non-accredited investors buy a stake in a company with certain limitations. It’s seen as a potential on-ramp to the traditional IPO, but shareholders have no guarantee there will ever be a market to trade the stock. The company must file offering documents and audited financial statements with the Securities and Exchange Commission.
A song can have many owners — from writers and performers to record labels and music publishers — with each entitled to revenue it produces. Smith pitches Royalty Flow as a way for average investors to take part in the gold rush from streaming.
For the brothers, the deal lets them partly exit an investment that didn’t look so great 25 years ago when they started working with Eminem. The only successful white rapper was Vanilla Ice. But they signed Mathers to a contract with FBT Productions and put out his debut record “Infinite.”
30 Copies
“It sold about 30 copies,” Martin recalled. Upset, Mathers returned with an alter ego: Slim Shady. FBT sold thousands of “The Slim Shady EP,” which eventually landed in the hands of mega-producer Dr. Dre.
While Dre receives most of the credit for turning Mathers into Eminem, the Bass brothers produced many early hits, including a dozen tracks off “The Slim Shady LP,” as well as “Lose Yourself,” the hit song from the biopic “8 Mile.”
“We really developed Marshall up until the time we brought him out to L.A.,” Martin said. “That’s when somebody heard him and got the tape to Dr. Dre.”
Earnings from the brothers’ Eminem holdings grew 43 percent to $5.07 million last year, according to Royalty Flow. The artist had sold more than 44.9 million albums as of 2014, according to Billboard magazine.
The proliferation of paid streaming has lifted the music industry after almost two decades of decline. A Goldman Sachs Group Inc. report recently predicted worldwide sales will exceed $40 billion by 2030, up from $15.7 billion on 2016.
Investor Interest
That optimism has produced a flurry of deals. BMG Rights Management GmbH acquired Nashville label BBR Music Group in January. In June, Imagem, which holds rights to 250,000 songs spanning Daft Punk, Pink Floyd and Stravinsky, sold in a deal Billboard pegged at $600 million. A couple weeks ago, Warner Music Group acquired Spinnin’ Records.
Investors will be able to buy as much as 80 percent of Royalty Flow, whose primary asset is future earnings from the brothers’ share of Eminem’s catalog. Though the rapper hasn’t released an album in a few years, he remains one of the most popular artists on streaming. More than 18 million people listen to his music every month on Spotify.
“We’re creating an avenue where we can cherry pick some of best assets in music business and provide an alternative asset for investors to participate in,” said Schneider, the chief financial officer.
This article was provided by Bloomberg News.
