Will You Invest in Eminem?
A new kind of investment is hitting the market -- an opportunity to invest in Eminem's music catalog. In this episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Dan Kline explain what that means, how it's possible, and whether or not this could make for a good long-term investment.
Also, listen in to find out what equity crowdfunding is, and how it's tied to this new offering; some of the most important risks that investors need to know about before buying into this or something like it; what the JOBS Act is and how it's making offerings like this possible for the first time; and more.
A full transcript follows the video.
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This video was recorded on Sept. 29, 2017.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, September 29th, and we're rapping about new investment opportunities. I'm your host, Dylan Lewis, and I'm joined on Skype by fool.com's jack of all trades, Dan Kline. Dan, how's it going?
Dan Kline: It's going great, and I promise not to rap.
Lewis: [laughs] Yeah, I'm going to try to do the same. It'll be hard not to, we are talking about something that's kind of interesting. It got a lot of splashy headlines earlier this week. Some cool news from the music industry that has crossed over into the investment industry.
Kline: Yeah, it's a really bizarre, but exciting opportunity. Really full of pitfalls though.
Lewis: Investors may soon have the opportunity to invest in rapper Eminem's music catalog. We're going to do a deep dive into some of the specifics that are available at this point with the filing. But before we get too far into that, I think it's probably worth going into how this type of opportunity came to be. This is a topic that we've touched on a little bit on the show before.
Kline: Yeah. It's really an alternate way to invest. It's somewhat like crowdsourcing, but you actually do end up with shares of the company, except for the fact that there's not all the financial due diligence you see during a traditional IPO or other investment opportunity.
Lewis: This really traces back to the JOBS Act, which was passed in 2012, as part of the Obama Administration. Like I said, it's something we talked about in past shows a little bit, but really, this legislation was aimed at making raising capital a little bit easier for small businesses, and making the path to going public a little easier for small businesses. One of the things that it's probably best known for, it has a lot of different components, is enabling equity crowdfunding, basically allowing companies to raise capital from average individuals in a way similar to how they would on Kickstarter or Indiegogo, like you talked about, Dan. But instead of giving $200 and getting a t-shirt or a book or a DVD or something like that, you're instead getting an equity stake in this private business. Before, only deep-pocketed accredited investors, basically high net worth individuals, had the ability to do that.
Kline: The problem is, these could be great investments, but they're also risky investments. They don't have all the financial due diligence that a traditional IPO would have. They also don't have people like us, the analyst and writers at Motley Fool and other financial entities, checking into them. To look at one that's out there now, it's Fatburger, the burger chain, it's on its way toward an IPO. If you like Fatburger, that may seem like a great idea. But if you don't really know everything they're going to do with the proceeds, how you might cash out, what the benefit is, it becomes riskier than a traditional share of stock.
Lewis: I believe Fatburger is going through the mini IPO process. Is that right, Dan?
Kline: They are. The mini IPO means you're raising under $50 million. It basically gives you five years, or when you reach $1 billion in revenue, before you have to meet the full reporting standards. Once again, if you truly believe in a company, this is a way to own a piece of it that you previously couldn't have. But, in many ways, it's novelty investing. You don't have all the tools to decide, Fatburger is using some of this money to buy another chain, is that a good investment? There's not a lot of details out there about that the way there would be if this was a traditional IPO.
Lewis: And proponents of this have said, this is this way to democratize access to these early stage companies. You look at this landscape of the tech unicorns, these high-growth companies that get all this press. And people are saying, as an investor, I'm locked out of this. I can't get into the equity rounds that these venture capitalists and angel investors can. And there's this kind of classism in the investment industry. So, this legislation is kind of aimed at saying, "OK, average investors, you can participate." Of course, that doesn't mean that these investments behave totally differently, and we will hopefully outline some of the ways that that's the case here. Similar to the Fatburger thing that you talked about, this mini IPO provision is something that the Eminem deal will likely be going through with royalty exchange.
Kline: Yeah. What they're looking to do is, two producers who work with Eminem own or have the right or the option to own a percentage of his catalog. They're looking to put that into a company, and you would be buying shares of that company. They say in the, let's call it mini prospectus, that they would also buy other passive interests. So, unlike music, a full label, they won't be publishing music, they won't be actively licensing, they don't own a controlling interest. In theory, they'll just be sitting back and collecting revenue. And that sounds very enticing, especially if you like Eminem, if he's someone you would like to own a piece of. The problem is, as much as that passive part is nice and it comes with less overhead, that also means they don't get to make any decisions when it comes to, we need money, so let's sell an Eminem song to a McDonald's commercial. They don't have the right to do that.
Lewis: In some ways, it's kind of like owning a building. You're really just owning an asset, you're not really owning a business in the sense that, Apple sells phones and they have levers they can use to increase or decrease the number of phones that are sold every year.
Kline: You're buying a revenue stream. And the way they intend to price it is based on the idea that streaming revenues have increased. They've gone up something like 60%, I think it's 47% this year and now it's over 60% of all revenue for the music industry. And you're buying into the idea that it's going to increase. The challenge with that is, while Eminem is actually a timeless artist, and he's still going to be played 10, 20, 30 years from now, what you don't know is how much, what the radio formats are going to be, what the streaming is going to be. And yes, he's one of the highest grossing artists in terms of royalties over the last decade. But, you don't know that's a progressively upward trajectory, even if the industry is trending upwards.
Lewis: Yeah, it's something that you only have so much control over. I will say, you look at a lot of these types of investment opportunities out there, these mini IPOs, equity crowdfunded businesses, a lot of them are super early stage restaurants. I know in DC, for example, there is a distillery in Ivy City, Republic Restoratives, that went through the equity crowdfunding process. The floor on a business like that is a lot lower than the floor on a business of Eminem's royalties are, for example. Because you have this established catalog of pretty strong performing assets.
Kline: Except what you don't know is, the people managing it, are they going to take this royalty flow and buy other royalties with a five-year timeline? A 10-year timeline? What's their cash out, what's their dividend structure? Yes, it's like buying a share of the building. Rents are going to come in, and if the building has been 100% leased for the last 10 years and it has 20 years of signed leases, the numbers are going to stay the same, maybe they'll go up. But you don't know what your out strategy is. You don't know how this stock is going to track. So, in a lot of ways, this is novelty investing. Yes, if you believe in a restaurant concept, it might be nice to take a flyer on it. And if you love Eminem, to buy a few shares makes sense. But I don't think you know enough to consider this an investment.
Lewis: I'm sure there are a lot of people who might disagree with you, Dan. But I think you're generally right. The big thing when you look at these types of opportunities is, beyond, the structure is slightly different than what you might be used to with investing in stocks, what you have available to you is a little bit different. We talked about the financial disclosures. And also, the way that these types of businesses operate are just different. You look at what they're able to raise with this regulatory filing, this A plus filing, it's capped at $50 million. So, even if they are selling a relatively small portion to -- royalty flow, I said royalty exchange earlier but it's royalty flow -- really doesn't mean that the size of that portfolio is going to be that big. So, you're looking at something that is likely a very small cap or micro cap business.
Kline: Right. They're buying somewhere between a 15 and 25% interest. Once again, not a controlling interest. And it depends what they do with that money. With any of these things, the micro IPO could be a partial cash out for the people who only asset. So, you have to look very carefully at everything they say they're going to do with the money. But, because of the reporting structure, they're not as obligated, and they don't face the same financial pressures. You're going to see some credible mini IPOs. The Chicken Soup for the Soul books and videos, for example, is on the path to a mini IPO, and that's a long-standing business. There's a lot of financials you can look at, there's a lot of history, you can pull up a best-seller list, video playlists. But when you look at something like the Eminem IPO, it's uncharted waters. Really, the closest thing is the David Bowie bonds, where he sold the rights to all his royalties for 10 years so he could get the cash up front, and that wasn't a disaster, but it did not turn out particularly well for the people who bought those bonds.
Lewis: So, Dan, I am not an 80s baby. I was born in 1990 and did not have my coming-of-age in the 80s. Would you mind giving a little primer on the Bowie bonds and what happened there?
Kline: Basically, David Bowie is a very experimental guy. He's obviously no longer with us. He has an Eminem-like, perhaps even more impressive, catalog of hits. And investors came to him and said, "We could get you," and I forget the number, but let's pretend, "$50 million, we can get it to you now, in exchange for the rights to whatever royalties come in for the next 10 years." And part of the reason this was not a great deal was, David Bowie was alive at the time of this, and he's an artist who cared about his music. So, he wasn't going to say, "Ooh, these people have all my royalties, I'd better be in every movie, I'd better sell to every commercial, I'd better be on every streaming service," whatever it was at the time. So, the actual returns that they got didn't equal what was put in. And I fear with the Eminem case, it's the same kind of thing. It's not like his royalties are going to dry up. He made $82 million in royalties between 1999 and 2016. That's not going to go away. But, it's not necessarily going to increase dramatically, because he's not going to take every opportunity, and that decision is very much in his hands. Eminem has absolutely nothing to do with this offering.
Lewis: And that's nuance that you just don't have when you're talking about standard company investments. The company management pretty much insert any small, mid or large cap business, they need to have their shareholders' interests in mind when they make a lot of decisions. And ultimately, they are serving their customers, shareholders and employees. Eminem has no obligation to the people who would be owning these shares.
Kline: Right. And you can see, even in big publicly traded companies where it becomes a problem, Chipotle (NYSE: CMG) just put out queso, and their queso doesn't feel like what you expect queso to because of their commitment to using high-quality ingredients. So, it can't have that chemical feel that queso normally has. So, their ideals are coming up against the interest of their shareholders. Eminem's ideals may be, "I'm not licensing my music anywhere, and they've already made a movie about my life." So, he can be very picky about how he licenses his music, because he probably doesn't need a ton more money. So, he's not going to pursue every opportunity.
Lewis: Yeah, I think he's probably sitting pretty right now. I think he has plenty of money, based on how successful the catalog has been already, and given that he came of age in the CD sales business when he could still make a decent amount of money selling physical CDs.
Kline: Yeah. If you knew that Eminem planned to buy the Detroit Tigers and needed to raise a bunch of money, this becomes a better investment, because maybe he would do everything he could to maximize his own earnings. But, as a guy who, I don't believe he's made an album in four or five years, he doesn't seem desperate for cash.
Lewis: No, I think you're absolutely right. If you're looking for more specifics and follow-up on this, like we said, I think they're looking to raise somewhere in the neighborhood of $11-25 million or so. But, they'll definitely be below that $50 million cap for the mini IPO process. The next steps for this are that the SEC needs to actually qualify the filing, and that will probably happen sometime in October. Talking a little bit less about the filing, and again some things that are just a little bit more broad stroke characteristics of this space and this type of investment, we talked about how there's some disclosure differences, the financials might look a little bit different, these are early stage businesses. But also, there can be some liquidity differences with these types of investments. When you are working in the equity crowdfunding space, particularly as a company that is private, you certainly don't have the liquidity that you would for a publicly traded stock that's on the exchange. Even in the case of this royalty flow business that has a mini IPO, they're looking to be on a public exchange. But if they are a smaller business, one of the things you need to keep in mind with a small caps and particularly micro-cap businesses is, liquidity just doesn't exist in the same way. You don't have nice, smooth stock charts. There are big hiccups when a major investor actually tries to get rid of some of their volume.
Kline: In many ways, this is fantasy sports. If you want to take 1% or 2% of your investment portfolio, and you see something that you really think has potential, and throw some money at it, that's great. Or if you really love a burger chain, or a musician, or somebody that's going through this process, I think it's great to have that fun extra interest in this person or thing or business that you care about. But, once again, and I cannot stress this enough, these feel like get-rich-quick schemes because they might be. And get-rich-quick schemes don't usually work out.
Lewis: Yeah, and I will say, this is one that I'm like, "Oh, there's a legitimate asset here that could perform fairly well over the next couple of decades," whereas a lot of the other things that we've seen come through this space have been restaurants or movies, where there isn't a track record of success. I think, like I said, the floor for something like this is a lot higher than a lot of the businesses that you see come through this space.
Kline: I love the strategy of buying interest in other music catalogs. I would look more toward people that are deceased, that they're really maximizing their catalog. There's absolutely huge potential there. It's become the new music publishing, which was always where the money was in the music industry. So, I like that model. What I don't see here is, they say they're going to do it, but there's not actually anything holding them to that. And they're five years away from having to fully report, because they're never going to hit $1 billion in revenue with this kind of money. So, you really have to believe in management, and here you don't really know much about management or what it's thinking. You also don't know what's for sale out in the market.
Lewis: Yeah. It's kind of a new frontier in a lot of ways, both for the average investor and the investment industry. Something that we're still exploring and figuring out. Listeners, like I mentioned, we have done episodes in the past talking about the JOBS Act, so we have some things that would be better primers and good background for folks who want to catch up a little bit. At South by Southwest this year, I actually sat down with Bill Clark and Slava Rubin of MicroVentures. Slava Rubin is actually one of the co-founders of Indiegogo. A really interesting guy. So, they helped talk about this space and walk me through how they think about it on the equity crowdfunding side. If you want more info on that, just shoot us a note and we'll be sure to send you along the episode. We kind of have a special guest here in the studio, Dan. I don't know if you know.
Kline: I do. I'm not there, but I know.
Lewis: Yeah, you can't see her because you're on Skype, but today is "bring your adult family to work day". Did I get that right, Austin?
Austin Morgan: That's correct. But as my mom calls it, it's "take your mom to work day."
Lewis: And she's been looking forward to this for quite some time, right?
Morgan: Since the day I got hired.
Lewis: Which is two years?
Morgan: Two and a half.
Kline: Why didn't you bring her last year?
Morgan: I was still a temp. I didn't have the option. [laughs]
Lewis: Well, you're here now, and she's here now.
Morgan: She is.
Lewis: I mentioned that I wanted to do something to bring her on the show, because I like to bring you on, and I thought it would be fun to bring her on. So, I asked her before we started taping to think about this. If you were to have a stake in some performing artist's music catalog, who would it be and why? It doesn't need to be an investment based decision. It can be, you just love this artist.
Mrs. Morgan: That's a really tough question, because I love a lot of artists. I think, if I'm thinking historically, I think I would love to invest in Elvis. If it wasn't just historical, I love TobyMac, also.
Lewis: That's outside my wheelhouse, I don't know who TobyMac is.
Mrs. Morgan: He's a local artist, he's a local Christian rap artist.
Lewis: Very cool. Austin, what about you?
Austin Morgan: I have two different directions I would go. Metallica, because Metallica. I mean, every good closer in baseball comes out with Metallica.
Lewis: [sings] We might get sued for me humming that.
Austin Morgan: Or, I would go with someone like Drake, because everything Drake puts out starts, not a movement, but you have kids yelling yolo after he puts out a yolo song. Yolo wasn't a thing until Drake.
Lewis: He's a pop culture machine.
Austin Morgan: Yeah. So, he puts out a song and it's just a thing.
Lewis: It just becomes the internet, the internet explodes. Dan, what about you?
Kline: Again, two answers. If I'm going passion, it's The Replacements. Timeless band, never got their due, really deep catalog. If I'm going money, it's Carly Rae Jepsen, because I have never gone a single day since Call Me Maybe came out where I have not heard that song. And I don't listen to pop music. It has to be the most played background music, when you're walking around the mall. So, she just has to be raking it in and I would love a piece of that.
Austin Morgan: I think you're listening to the wrong radio stations.
Kline: I'm not listening to radio at all. It's just in the ether.
Lewis: Yeah, there's a whole class of music that just gets played at malls. It's feel good music, it gets people going, it's energizing. For me, the economic side of this, Jimmy Buffett all day. Give me Jimmy Buffett, long-term. People love Jimmy Buffett. I don't. I think his music isn't that great. But a lot of people really like Jimmy Buffett.
Austin Morgan: I think that's the winning answer right there.
Kline: I think "isn't that great " is putting it very politely. [laughs]
Lewis: But, for just my own musical tastes, I got to go Chance the Rapper, I am a big fan of Chance the Rapper. Love what he's doing on the indie side. Perhaps not the greatest for making money, because he's not signed to a recording label. But, he seems to be doing OK. Dan, we kind of got off track a little bit here. Anything else before we wrap the show and I let you go?
Kline: Yeah, let's bring it all back home. These alternative investments are playing. It's going to the track, it's gambling. And you have to be very, very careful with them.
Lewis: Which is to say, this is an emerging space. So, it's not surprising that those are the characteristics. We might hit a point, years down the road, where it's a little bit more established and we have a better baseline. But the reality is, not too many companies have taken these routes to raise money. And we don't have a good three or five-year track record for how some of these companies have performed. I think that's kind of a good note to close on. Be cautious, investors, as you see these types of opportunities come up.
Kline: Absolutely.
Lewis: Listeners, that does it for this episode of Industry Focus. If you have feedback or questions, shoot us an email at industryfocus@fool.com, or tweet us @MFIndustryFocus. If you're looking for more of our stuff, you can subscribe on iTunes, or check out The Fool's family of shows over at fool.com/podcasts.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan and his mom for all their work behind the glass. For Dan Kline, I'm Dylan Lewis. Thanks for listening and Fool on!
Daniel B. Kline owns shares of Apple. Dylan Lewis owns shares of Apple and Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Apple and Chipotle Mexican Grill. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.