With revenue royalties, structured to provide investors with periodic payments of a percentage of a company’s defined gross revenues, there is a risk that the issuing company’s projections of minimum revenues will not be achieved. This disappointing non-achievement may be caused by macro changes in the environment and economy or by the fact that the company’s customers, for whatever reasons, are not purchasing the anticipated levels of goods or services.

There is primarily the risk which royalty investors accept: that revenues will not achieve the minimum levels expected at the anticipated times; therefore, the royalties will not be paid on time. The terms of royalties generally require that royalty payments be made immediately, upon the receipt of revenues, which means that the obligations to royalty investor never become an account payable of the royalty issuing company. The terms of a royalty can also include a range of remedies to activate if the anticipated schedule of royalty payments is not being met.

Since the funds received by companies are intended to finance the growth of the company issuing non-equity-diluting royalties, these transactions have a positive benefit to royalty investors. Consequently, there would be an overall social benefit and specific community benefit if there were a way of reducing investor risk. Therefore, a business opportunity for independently assuring investors that the amount they invested would be returned.

Of course, the assurance offered by such a Royalty Payment Assurance Company (RPAC) will make it easier for companies to place a royalty, and on more favorable terms than for a royalty that does not include RPAC assurance.

RPAC will be paid a fee by the royalty issuing company in return for its agreement to offer to buy from the investors who hold a defaulting royalty the difference of what has been paid to date in royalties and the amount originally invested. The transaction will occur at the time of royalty payment default if the investor wishes to sell the royalty. The RPAC will be involved in the royalty term negotiations and only offer to buy royalties from investors if satisfied by the terms agreed.

RPAC will then, as the new owner of the royalty interest, seek recovery and whatever additional benefits there may be as a part of the royalty agreement.

It is expected that, because of exacting due diligence, most royalty issuing companies will not default and that therefore the RPAC will benefit from the fee paid by the portfolio of companies whose obligations have been assured.

RPAC will limit its risk exposure to a small percentage of its capital base and will seek investments from institutions that are motivated both by increasing social benefit and by earning profit.

 

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