Royalties – TBD©

Royalties, the sharing of revenues, is believed to be the second oldest form of business practice after the concept of individual property rights evolved. Barter, the exchanging of one thing for another was most likely the first form of business.

Barter occurs when individuals complete a trade based on “you give X to me and I will give Y to you” or “you do X for me and I will do Y for you”. The earliest trades could have been crop growing or hunting based. An agreed amount of something was traded for an agreed amount of something else.

The next logical form of business based on asset ownership was to allow the use of an asset for an agreed share of the benefit. The dominating royal owner of land allowed use of the land in exchange for a fee or royalty payment of a percentage of the products or benefit from the land being paid to the royal owner of the land. The royalty payment was simply an asset use fee.

Asset use fees evolved and allowed those either not knowing one another or not trusting each other to make assets useful to others. Those paying for passage in a vehicle or on a vessel or those paying rent didn’t have to have a direct contact with the owner of the service. They only needed contact with the user of the asset, who may well have been paying a share of the revenue, a royalty, to the owner of the asset.

Money is the property or asset of some person or entity and that money can be loaned or invested. The investment of money can be in land, a building or a partial or complete ownership of a business. If the business has been incorporated then the ownership is represented by shares and shares are the evidence of ownership, as debt is an obligation and agreement to pay an amount either on demand or at a future time and is evidenced by a certificate. Previously, share certificates and physical notes, both known as securities, were exchanged in the clearance of transactions. Securities transactions are now mostly electronic and if publicly traded, subject to monitoring by securities regulating government agencies.

When a publisher or producer acquires ownership or the right to use an author’s music or manuscript the author typically receives a percentage of the revenues produced by the distribution of the author’s work. This is a royalty, the same as when an inventor licenses a company to use the intellectual property of an invention, there is frequently a royalty paid to the inventor. In none of these asset use fee or royalty arrangements is the licensed user issuing to the asset owner a security. Hard rock mining, oil and gas production and exploration and other extractive industries have been traditional users/issuers of royalties.

As money is an asset of the investor, and defined revenues are an asset of a company, which can be partially sold to the investor, the royalty is not a security. A royalty is not a security because it does not have either ownership interests or voting rights in the company issuing the royalty. A royalty is simply the purchase by an investor of a percentage of a company’s revenues for an agreed period and on agreed terms. Royalties issued to investors are sometimes referred to as revenue royalties to distinguish them from inventor or author royalties. Revenues can be minimally assured and used to enhance debt. To be fair, royalty agreements should contain issuer rights of redemption.

Therefore, it seems reasonable to believe that if royalties are contractual obligations of issuers to make contingent payments to contractual right purchasing investors, there is no need for security regulations to be applied to royalty transactions. Such a determination would be of great significance to the business owner as royalty transactions could then be accomplished more cost effectively and expeditiously than issuing securities, permitting increased business development and expansion.

In most cases of privately-owned company use of royalties the transaction size will be smaller than typical public offerings of securities. Investor liquidity needs can be addressed in the terms of the royalty. However, as professional investors are continually seeking favorable income opportunities and royalty issuers are likely to wish to redeem outstanding royalties, the liquidity requirement should not be a problem.

The use of royalties, rather than securities, also allows owners to make better decisions, improving the longer-term interests of the company and also of themselves, rather than meeting the demand for ever-increasing higher reported per share earnings, by those who only bought the shares for the purpose of selling them at a profit. Revenue expansion reflects company marketing skills and customer satisfaction. Extreme profit margin focus can be adverse to and in conflict with customer interests.

Royalties are the better way of both investing in and financing of privately-owned companies.


Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100

©Copyright 2020 British Far East Holdings Ltd. All rights reserved.




Blog Management: Viktor Filiba

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