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How Can Fans Invest In Bands?

Imagine a world where a young fan of a new band has the choice between buying a t-shirt, or a download, or a vinyl... or a share in a new band that could generate a return on investment and possibly a significant one...

I've been kicking this idea around for a while now - as a fan how can you invest in a band?

Sure, you can go on Kickstarter or Pledge Music, or any other crowdfunding site that works with musicians, and you can pre-order a band's album or t-shirt but you're simply committing to buy something for a given price. If enough people also commit to do the same you'll get your item. This is great for musicians because, assuming their crowdfunding campaign hits its financial target, they get guaranteed income with little risk - but from a fans' perspective it's not an investment.

In fact there have been some high-profile examples of people who lent their financial support to a new business but who didn't get any equity in that enterprise and arguably lost out in a big way. One of the most famous examples of this is Oculus Rift who got $250,000 from a Kickstarter campaign and then got acquired by Facebook for $2 billion. The financial upside for those early supporters from the Kickstarter campaign? Nothing. They got to keep their t-shirt (or whatever they purchased).

Oculus Rift's Kickstarter supporters didn't 'invest'. They just bought something from them via Kickstarter in a similar way to someone buying any item from a retailer.

But investment is different and with it comes a portion of risk - you'll win some and you'll lose some.

So, as a fan, is there a way to do this with bands? If you really believe in a band or artist when they're playing at London's Barfly venue - is there a way to back your instincts and put some money in so that when / if they're playing Madison Square Gardens in New York you see a return on your investment?

Well, I'm wondering if there is - or there could be soon - and it's to do with music publishing.

When bands talk about signing a publishing deal they most typically mean a co-publishing agreement. We'll skirt some of the fine details here because these deals vary greatly, but in very broad brushstrokes with a co-publishing deal a music publisher gives a band a financial advance (e.g. $50,000) typically in return for a 25% interest in that artist's song(s). Income is generated every time a song gets broadcast, performed or purchased pretty much anywhere. The publisher keeps 100% of the band's royalties until the $50,000 advance has been paid back to them. From that point the publisher keeps their 25% and the band keeps 75%.

So, what happens if the aforementioned advance isn't paid for by a music publisher? What happens if a band asks 1000 of their fans to each contribute $50 - thus achieving the same $50,000 advance but giving fans a financial interest in the band's business?

You see moving forward - every time a royalties cheque came through the post from one of the organizations that collects publishing royalties (e.g. BMI, PRS, ASCAP) it could be split into 1,000 pieces and paid out to the fans as a dividend.

And that genuinely rewards early support and gives fans real bragging rights that they knew such-and-such a band was going to be massive and that they'd be played all over the radio and perform at big venues.

And despite the turbulent times that the recorded music business has felt in the last 15 years - music-publishing income has remained strong. BMI and ASCAP in the US reported staggering amounts of revenue collected on behalf of songwriters in their last fiscal years. Nearly $1 billion each. In fact PRS in the UK reported even more.

So, is it possible to sell shares in a band or artist's publishing?

Well, there are some fairly complicated rules that govern investment and equity crowdfunding for fledgling businesses and I wouldn't claim that the below is highly detailed but it's a snapshot of where we're at and the opportunities (or otherwise) that there might be.

1. 'The Equity Route' (under current rules). A band or artist could theoretically self-publish their music through their own Limited Company or LLC and then sells shares in this entity. There are several players accredited in the equity crowdfunding space who could facilitate exactly this sort of enterprise. Companies like, but not limited to, Fundable (US), Seedrs (UK), Crowdcube (UK) and Tilt (US).

2. The non-equity route. Now, this is a slight leap, but is a proportion of a band's publishing business really a 'share' or 'security'? Certainly 'shares' in a band's publishing business would probably fail the all-important Howey Test in the US but would it be defined as such in all countries? If it's not a considered a share in all countries, and it's just an agreement between band and fan then that changes everything and you wouldn't have to adhere to the quite stringent equity crowdfunding rules in place currently. In fact, you could operate a Kickstarter-like-model where people aren't buying a CD or a t-shirt they're buying a commoditized unit in the band's publishing business. And you could do it now.

3. 'The Equity Route' (under forthcoming rules). Rules in the UK around equity crowdfunding are quite strict but in the US the picture is more fluid. The crowdfunding industry in the US has been waiting with baited breath for The SEC's guidance on what can and cannot be done in this space. What's anticipated is a much more open set of rules that could make it easier for individuals, of all types, to invest in businesses like Oculus Rift or, potentially at least, a musician or band.

The Australian government "is considering a crowdsourcing blueprint to limit capital raising to $2 million a year. Anyone could invest but only $2500 a year in a single start-up". $2500 AUD per person is more than enough to get a crowdfunded music investment model working with real equity. And there's little to prevent a band registering their songs in a different country and then allowing that country's copyright collection society to process all global royalties. We could see almost any country in the world emerge as the most relaxed with their equity crowdfunding laws and as long as they also have a robust collection society to ensure musicians get paid when their songs are used then this route would certainly work too.

So, suddenly this all starts to look very doable and if not now then soon!

And probably the most interesting part for me is to imagine the things that this might affect.

Imagine a world where a young fan of a new band has the choice between buying a t-shirt, or a download, or a vinyl... or a share in a new band that could generate a return on investment and possibly a significant one.

At that point we're introducing fan-driven entrepreneurialism into the music business. On one hand, individual fans with the greatest ability for spotting, and investing in, new talent suddenly look like serious players in the music business.

On another level tastemakers, curators and the blogosphere won't decide whether a new band or artist is exciting. The fans will. 'That's already happening' you may say. And you'd be right.

Except this time the artist and their fans are going to be in it together..

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