An exchange by investors of their stock holdings for revenue royalties issued by the same companies would reduce those companies’ equity dilution, benefiting the remaining shareholders.

Although shareholders may initially suffer a loss versus the market value of the stock owned, if they have a positive view of the merit and value of the company’s products or services, they may prefer instead to participate in revenue growth rather than being exposed to stock market volatility.

The say, 10-year revenue royalty (royalty), could be structured to have minimum protected revenues, and therefore royalty payments, sufficient to cumulatively equal the present market price of the shares within say, 5 years, leaving 5 additional years of highly profitable revenue sharing. This represents a much faster return of the investment amount for a stock with a P/E of 10, which would require ten years.

It may be possible for the shareholder to recognize, for income tax purposes, the loss on the shares exchanged for the royalty, a promise to pay, could be modestly valued. In any case, the royalty payments received should be tax-free for the investor until the cumulative payments reach the cost of the royalty, which would be the transaction value. The royalty payments should be tax deductible to the royalty paying company.

The terms of a royalty can include an Issuer’s Right of Redemption, permitting the Issuer, on pre-agreed terms, to redeem and thereby terminate the royalty. Such a redemption may be desired in the case of the Issuer wishing to engage in a merger, acquisition, or new financing.

It is also possible that the terms of a royalty could be sufficiently attractive to induce shareholders to either forgo royalty payments of an agreed amount, during an agreed period, or accept a lower royalty rate.

We seek to professionally advise both investors and royalty issuing companies on the structuring of royalties.

 

Arthur Lipper, Chairman                  arthurlipper@gmail.com
British Far East Holdings Ltd.