Things Which Are Beautiful Are Not Always What They Appear To Be

We are all guilty at times of allowing “the wish to become the parent of the thought,” and promoted investment opportunities can and frequently do become truly ugly.

Descriptions of why investors are sometimes urged to make an investment quickly include:

• Their new device or product is going to be a great success and “if they only capture 10% of the market…”

• The new CEO is sure to make the company much more valuable quickly…

• Another company is just about to make a high bid for the company and there are others also interested…

• There is going to be a recommendation to buy the stock by X publication or advisory service…

• There is a short squeeze and some of the hedge funds are being called and will have buy to cover their shorts…

• The company is about to announce ___________

We’ve all heard and received the pitches.

In recommending the use of royalties in the financing of privately owned companies, we are stating our view that “Royalties are the better way of both investing in and financing of privately owned companies.”

This is because royalties are based on the growth of revenues and not on reported per-share earnings or changes in valuation levels. Predicting a company’s revenue trends is far easier than predicting future per share reported profit levels, and is not open to radical changes because of market manipulation, hype or perception.

Here are some of the interesting features of a typical royalties transaction:

• Royalties can be distributed quarterly, or be credited for an agreed period of time in return for a higher royalty rate.

• Royalties can be assured as to minimum payment levels by the issuing company.

• Royalty investors can be protected from companies failing to be contractually-compliant.

• Royalties can be redeemed by issuers at multiples of the investor’s initial cost.

• Royalties can be used as an incentive to make loans to a company at reasonable interest rates, and then commence upon the repayment of the loan.

• Royalty funds can be developed with a specified market or geographic range, or based on specific products, industries or services.

• Royalties can be assured returning a minimum cumulative payment within an agreed period.

• Royalty investors are only concerned with the issuer’s sustainability and growth of revenues, not levels of executive compensation or other overhead elements.

• Royalty returns are much simpler to understand than equities. Investors know immediately, through notice of revenues deposited by the company, the amount of payments which are due and made.

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P.S. The photo above is a White Egret Orchid