The most conservative of investors seek investments having the possibility of producing superior income, if recapture of the capital invested can be assured. This would be like the stock investor always buying a purchase price put, for the number of shares purchased. The cost of the investment would be increased by the cost of the put, but it could still be very profitable, with a risk which is fully mitigated. In some cases, this risk protection could also justify the use of leverage.
With regard to revenue royalties, any company, even a startup, can successfully sell to investors a percentage of their future revenues, if there is an assurance that the amount invested will be returned, either as a result of royalty payments made by the royalty issuing company or from an assurer who is acceptable to the investor.
This new concept of independently assured royalty payments does not lock in investment profits, but it does assure the reduction of capital risk. In other words, with this approach if a royalty is assurable it should be financeable.
Of course, both the investor and the company issuing the royalty must pay a price in order for the independent assuring entity to accept the risk of assuring a return of principal to the investor. The issuing company pays a fee at the time of the assurer’s risk acceptance and the investor pays a fee by being willing to accept a lower percentage of the issuers revenues, after the return of principal.
The mechanics are that the investor receives the full royalty rate percentage of issuer royalties until he receives back all of the capital that was invested and thereafter a lesser royalty rate up to the maturity of the royalty payment period. The assurer will receive royalty payments of the difference between that originally agreed and the amount paid by the issuer to the investor. For instance, the royalty sold to the investor could be for 6% of the company’s revenues until the principal is recaptured, and thereafter the issuer will pay 3%, with the assurer receiving a 3% royalty.
Therefore, it is the assurer who will negotiate with the issuer the initial terms of investor protections, while leaving intact the standard investor protections we recommend.
The magnitude of the revenue sharing between investor and assurer will depend on the stage of business development of the issuer because there is an obvious risk differential between assuring royalties issued by established and by pre-revenue companies.
Assurers must be entities satisfactory to the investors and this satisfaction can be based on a number of factors. It is important to understand that the liability of the assurer is reduced by each royalty payment made by the issuer. Escrowed assets satisfactory to the investor, can be held by an agreed third-party, permitting non-financial institutions to be assurers. These are all details regarding which we can provide advice and assistance.
For issuing companies, a relatively small financing arrangement involving an assurance fee, paid from incoming funds, will be the cost of the assuring process.
For investors, accepting less than optimal returns, following the return of capital, should be for some investors and most fiduciaries, an acceptable deal, especially in the case of investing in pre-revenue royalty issuers.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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