A New Dawn? Eazi’s Music Equity Scheme and Prospects for IP Securitization in the Nigerian Entertainment Industry

"Don't wanna see you with nobody, nobody, nobody.."

Introduction

Few weeks back, Nigerian Singer Oluwatosin Ajibade "Mr. Eazi" released his EP “Something Else”, his second in two years, which doubles as the first major Nigerian music project of 2021. The lead single on the EP is “The Don”, a spirited afrobeat anthem, whose Godfather-esque title teases a complete ascendancy for the crooner. If the title of the song turns out to be eponymous, it would be apt.

Mr. Eazi was always Mr. Eazi; from early hits like “Skintight” to last year's collaboration with heavyweights Major Lazer, Nicki and Barbie on “Oh My Gawd.” But it is his booming empire and endless business maneuvers in the last two years that is setting him on course to becoming “Don Eazi.” Between his Banku Music, a self-built new-age record label, his emPawa, an avant-garde talent incubator for African Music Artists and his African Music Fund (AMF), a 20-Million-dollar fund to support existing and emerging African musicians on the continent, there is barely any comparisons for his business acumen and insight within the African music space. But his masterstroke yet, just might tease a new kind of business entirely.

On the 9th of December, Mr. Eazi casually announced that he was going to be trying an experiment with his next release. The experiment was to allow fans buy equity in his songs and share in the profits from his music streams. There was a lot of buzz following his tweet and ideas went flying as to just how exactly he plans to execute this exciting idea. In few days, the form shared on his twitter page for indicating interest in the scheme was withdrawn – it was already full! For me, an IP enthusiast, my thoughts all through was “Bowie Bonds!”

Every IP enthusiast knows of Bowie Bonds. Bowie Bonds, born from David Bowie’s imaginative securitization of his music catalogue, remains the first and most popular incident of IP securitization the world over. In the mid-1990s, English singer and superstar David Bowie, his financial manager Bill Zysblat, and banker David Pullman came up with a idea to generate cash from Bowie's extensive music catalogue. In 1997 Bowie sold securities backed by music assets, dubbed "Bowie bonds", which awarded investors a share in his royalties for 10 years[1], in a deal that sent the music and IP industries into near orgasm.

Mr. Eazi is in most things different from the scintillating eccentricity and unique creative expression of David Bowie, but it is hard not to see the parallels between both their ideas. 

IP Securitisation: What is it really? 

IP securitization sounds like a really complex idea. Like most things which do, it is not.

It starts with securitization. Securitization involves the pooling of cashflow generating assets to form a financial instrument which is then exchanged for immediate payment. For example, I can pull together a number of cashflow generating loans (cashflow being the steady repayments on the loans) and make into an instrument (a structured deal package), and give same out to willing investors for immediate cash. They get the gradually accruing repayments on the loans in my stead and I get immediate cash. That is securitisation.

Securitization of intellectual property then refers to the issuance of security backed by intellectual property and valued based on the expected future earnings of that intellectual property. It is basically a financing technique which allows for the capitalization (i.e conversation to capital) of IP rights that generate predictable streams of cashflow in order to obtain interim financing.

Let me break it down using an example with IP rights in music:

• What the right of ownership in IP gives the owner of IP is a collection of exclusive powers over the subject of IP ownership. 
• With music, the right of the IP holder are two kinds of rights – economic rights and moral rights.
• Economic rights allow the owner to derive financial reward from the use of their works by others, while moral rights allow authors and creators of music to take certain actions to preserve and protect their link with their work.
• Economic right is why artists gets paid royalties for use of their music, as well as for almost every kind of exploitation.
• The avenues to make money from music are plentiful and economic rewards for owning IP in music could include royalties, payment for performances, payment for licenses, payment for adaptation or derivation (sampling) etc. 
• Some of these money-making outlets generate steady cashflow – e.g royalties, which are paid whenever song is sold, distributed, embedded in other media or monetized in any other way, including through streaming.
• So, the entire idea behind IP securitization, using music as an example, is to take the right to a steady stream of receivables, such as royalties’ rights in music, and capitalize it (i.e turn it into immediate cash) by giving it out through an instrument (in the manner of income accruing securities) in exchange for immediate payment.

IP securitization can be executed by way of debt or an equity. As debt, the investors pay money and receive securities backed by the IP assets (e.g bonds) and then the investors are repaid in full-from the cashflow generated by the song at a time agreed in the future. Once they are fully repaid with interest, the deal concludes. It is like a company issued debenture.

As equity, the investor continues to make money from the cashflow generated by the IP assets to the tune of their ownership in the IP asset, for as long as it makes money. In exchange for sharing in the risks, equity schemes allow investors to continue to chop from their investment in perpetuity. It is like owning shares in a company.

So, the brilliance of IP Securitization by way of equity allows say Mr. K who owns copyright in Jappa (a song) to break the royalties entitlement in the Jappa and give it in small portions to other people, who will now be entitled to portions of the royalties that accrue to Jappa, in exchange for giving him money.

IP Securitization in the Music Industry – Is it Possible? Is it happening?

Since the incident of Bowie’s Bonds (which sort of flunked[2]), there has not been too much happening in the core IP Securitization space. The initial excitement over Bowie Bonds and other early deals[3], was followed by a recent lull, during which it was thought the idea was dead.[4]

There has however been some recent resurgence in IP securitization by way of equity, in the music space. In the last few years a new genre of IP Securitisation, which employs a different set of tools, has arisen. This new model is technology backed royalty securitization and it has been heralded by the likes of Royalty Exchange and Vetz.

The new model hinges on utilising the internet to attract lots of smaller, individual investors[5] instead of a single investor as in a traditional financial arrangement as was the case with Bowie’s Bonds. It is sort of like crowd-sourced investment in music and this is made possible because of the internet. But it is not any more crowd sourcing than Bamboo’s “piecemeal investment” business model is, where shares in big corporations are sold in smaller units to a large group of everyday investors who can be accessed through the ease of the internet. 

What makes this new model work is the fact that it capitalizes on a new type of royalty stream for music, also made possible through the internet - streaming! Streaming royalties bring a different spin to royalties’ earnings. With royalties for physical reproductions (which the likes of Bowie relied on) you only make money once for each physical reproduction. With streaming, artists can make royalties with each time the song is streamed by any person. A single person can stream the same song 20 times a day and this means royalties for each stream, continuously. Basically creating lusher receivables potential for IP holders in music and creating the basis for a new package for “Bowie Bonds.”

Bringing it home to Nigeria – What Eazi is Planning? Is it Possible in Nigeria? Should Other Artists Try it?

It is not at all certain at this point what Mr. Eazi has in mind. Of course, there are many ways he can achieve his music equity scheme. He could go with a traditional equity-based royalty securitization and have select people fund the song in exchange for percentages of the royalties in a private-placement-like arrangement. To do this, he can allow a number of people invest directly in the song before it is made, or he could give out bits of ownership in the royalties after the song is made and released. Afterwards, he could alternatively create a Special Purpose Vehicle (SPV) to hold the royalties in the song and make payments of accruals from the royalties of the song to the people who hold pieces of ownership in the royalties.

But if he is planning to go the route of the new model of royalty securitization, used by the likes of Royalty Exchange, a lot of questions come to mind as to it is legal (and practical) feasibility within the Nigerian context. First, is there a legal framework or at least, a legal allowance for outright IP Securitization in Nigeria? A far as I know, there is no conscious framework for IP securitization in Nigeria. In fact, there is no provision of law touching expressly on IP Securitization. It is enough to run with though that there is no express prohibition by law either. Neither the Copyright’s Act/the Copyright Commission, or the Investment & Securities Act/The Securities and Exchanges Commission outlaw or in any way prevent transactions in IP as securities.

That said, how feasible would it be in practice to achieve? i.e, how possible would it be to create a platform for securitizing and offering royalties to the public in the manner of the likes of Royalties Exchange in Nigeria? There is a high chance that something like this can be achieved in Nigeria. An entity can very possibly be created to offer equity in securitized royalty rights in music or to offer equity in other kinds of securitized IP rights. A license by the Securities and Exchange Commission may be needed to do so however. The SEC is empowered under Section 13(b) of the ISA to register and regulate securities exchanges, capital trade points, futures, options and derivatives exchanges, commodity exchanges and any other recognized investment exchange. Royalties Exchange, for instance, is registered with the U.S. Security and Exchange Commission in the US. If a strong enough case is made for the licensing of such an entity and all legal requirements are satisfied, it is expected that the SEC would issue the necessary license.

Is there anything to be worried about?

There are usually three key considerations in IP Securitization, however it is executed: Contracts, Structure and IP Valuation. The contractual aspects of IP Securitization are comparatively straightforward. Although the network of contracts that would need to be drafted assigning interwoven portions of interests in royalties may be cumbersome and tricky, they would not raise many issues that good lawyers cannot navigate.

Structuring on the other hand falls equally between choice and expertise, in any kind of IP securitization deal. The person looking to securitize IP would have to make a choice on what they hope to achieve and what rights they are willing to give, and the lawyers and financial advisors would be able to structure a deal model that works. They could use anything from Special Purpose Vehicles to Companies to Exchanges to achieve the goal. The issues around structuring would be tied to the peculiarities of each case and what the protagonist is willing to give and take.

Where the major issues would lie would be in IP valuation. IP Valuation is still somewhat novel to Nigeria, and between the paucity of ready expertise and the lack of antecedents, it may prove a hurdle. IP Valuation is key to IP securitization, especially where it is in the form of an equity scheme. In valuing IP, many factors are considered, ranging from the performance of the asset, where the asset has history, to the remaining useful life (RUL) of the copyright to the goodwill and market appeal of the owner. Typically, valuation can be carried out using either a cost-approach, which factors the expense undertaken to create the IP and the cost or reproduction, or a market-approach which emphasizes the cost of similar asset in the market or an income approach, which values the asset depending on its ability to generate cash flow in the future. The preferred method for IP Securitization, of course, would be an income-based valuation. Whichever method is used, the lack of antecedents in the IP market may leave valuers without reference points and raise risk of undervaluing or overvaluing the asset. But this is not a hurdle that cannot be surmounted with

Prospects for the Nigerian Music Industry

The Nigerian Music industry could use all the help it can get, investment wise. In the wake of the prominence of the Nigerian sound on the global scene, there is a wider market for Nigerian music and a soaring outlook for wealth creation for artists in Nigeria. But this is only possible with sufficient investment (and regulation) in the music industry. What this means then is that IP Securitization may be able to step in to provide much needed investment into the Nigerian music space and possibly open up prospects for growth across the landscape of entertainment in Nigeria.

In a way, should Eazi’s move turn out well, it could serve a strong proof of concept for other interested onlookers and create a rave in IP Securitization in the Music Industry in Nigeria, similar to what happened in the US Music space following David Bowe’s audacious play. I will be there for it! It is good that it is Mr. Eazi making this move. There are few, if any, in the Nigerian music space with the precedence, capacity and positioning to pioneer this. I could very well have been nobody else.

[1] Tom Espiner, 'Bowie Bonds' - The Singer's Financial Innovation, BBC News

[2] Gillian B. White, David Bowie: Musical Innovator, Financial Innovator?, The Atlantic (Jan. 11, 2016) < https://www.theatlantic.com/business/archive/2016/01/david-bowie-bonds-banking/423627/#:~:text=Initially%20Bowie%20bonds%20were%20given,level%20right%20above%20junk%20status.>.

[3] Jordan Weissmann, Bowie Bonds - Ziggy Stardust’s Adventures on Wall Street, SLATE (Jan. 11, 2016), < https://slate.com/business/2016/01/bowie-bonds-ziggy-stardust-s-adventures-on-wall-street.html>.

[4] Intellectual Property Expert Group, IP Securitization in Europe, IPEG (Jan. 30, 2005), < https://www.ipeg.com/ip-securitization-the-new-hot-thing-in-europe/#:~:text=Securitization%20normally%20refers%20to%20the,securities%20backed%20by%20those%20assets.&text=As%20more%20cash%20flows%20are,Europe's%20first%20IP%20merchant%20banking.>.

[5] Kristelia García, Royalty Securitization, JOLT DIGEST, (Oct. 23, 2017) < https://jolt.law.harvard.edu/digest/royalty-securitization>.