Royalty Investor Protections and Possible Use of Assured Royalty Payments

The Investment in a royalty issued by a privately-owned company is a contract between the company and an investor buying the royalty. The risk to the royalty investor is that the company will not generate sufficient revenues to meet its contractual obligations.

In the case of royalties, which we design and recommend, the royalty investor has a 60-month option to demand a repurchase of the royalty, at the investor’s cost, less the value of royalties already paid, thereby terminating the royalty. In securities industry terminology this is an exercisable at maturity, put contract. One of the basic elements of our patent covering royalties is that the royalty issuer is required to pay to the royalty investors the agreed percentage of defined revenues, immediately on receipt of revenues.

For additional investor protection, the royalty issuer will be required to contingently assign ownership rights to agreed company assets to an agreed third party, in order to secure the issuer’s contractual obligations to the investor. However, there is still a theoretical investor risk, as the process may not be sufficient to assure the return of the investor’s capital.

I now present the concept of an issuer-independent Assurer, to be more fully described in a subsequent memo, which would assure the investor of a full recapture of the investor’s invested capital, at the end of an agreed period. The royalty issuing company will pay the Assurer a fee for providing the investor with investment recapture assurance.

In the case of royalties issued by companies not yet revenue generating, the Assurer will also be paid a royalty by the issuer, once the investors have been paid an amount sufficient to offset their payment for the royalty.

The Assurer’s contingent fee could be 50% of the investor’s post 100% return of amount invested, as exceeding an annual 10% of original cost.

If royalty investors wish capital recapture assurance for revenue generating companies the Assurer will likely be willing to provide such assurance for a modest fee.

The terms of the royalty payment assurance contract will be negotiated by the issuer and the Assurer.

The result is that with the royalty payment assurer’s agreement the investor’s possible risk is completely covered. Indeed, the investor could consider using leverage in the purchase of assured royalties. Of course, it would be preferable if the projected royalty payments were cumulatively at least sufficient to offset the cost of the money needed to buy the royalty.

Therefore superior returns may be obtained with no investor risk, albeit at lesser levels of return than would have been the case if the royalty payment assurer’s risk eliminating agreement had not been utilized.

It does seem, in the case of situations where optimistic appearing revenue projections are achieved, that investors using royalty payment assurance can have their cake and eat it too.


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

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Blog Management: Viktor Filiba

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