Fractionalizing Ownership of Image Rights & Creating Human Corporatehood (Initial Brand Offering Part II)
*TLDR: For those who don’t want to dive into the deep end, here’s the footnotes:
- Brands can be corporatized by assigning an artist’s masters, image rights, and copyrighted emotes to a company
- Ownership of the ‘Artist Company’ could then be fractionalized into tokenized securities and sold via an Initial Brand Offering (IBO)
- An IBO is a hybridized Initial Coin Offering (ICO), where the tokenized security is registered with the SEC and thus provided an unlimited offering size. The offering can remain open to all investors (not just accredited investors), have no marketing limitations, and is eligible to Canadian and American issuers
- IBOs are structured to be more inclusive than IPOs, but the ease of participation in an IBO and an IBO’s liquidity is strongly dependent on the interface the IBO is offered through and the popularity of the Artist’s brand, which, I hypothesize, will directly correlate to the IBO’s liquidity
Initial Brand Offering
An Initial Brand Offering (IBO) is an initial public offering of a holding company that owns an artist’s image rights, brand assets, and, potentially, other companies that the artist has started based on their success in music. For example, if we were to take Kanye West, and corporatize his brand as an artist, we’d have a holdings company of the following assets:
As we can see, we separate Kanye as a rapper and producer (i.e. a Music Artist), the co-founder of his youth apparel line KIDS, the co-founder of his music label GOOD Music, a co-owner of Tidal, the founder of Yeezy, and the founder of DONDA. In our model, all of these businesses are held by the holding company Kanye West Corporation.
Let’s say that Ye only wanted to do a public offering of his business as an artist. Effectively, he would assign his image and personality rights and the ownership of his music to his Kanye West Music Company (KWMC)— effectively the corporatized version of himself as a music artist. Kanye West would be a full-time employee of of KWMC.
The company, to date, has sold 21 million albums and 100 million digital downloads worldwide. If we approximate the cost of an album at $9.99 and the cost of a ‘digital download’ at $4.99 (average between $0.99 per digital song and $8.99 per digital album, since his statistics don’t clarify), Kanye West Music Company would have a total revenue of approximately $708.8M over a 14 year period, or approximately $50M in revenue per year (save any net present value analysis). The aforementioned projections don’t take into account royalty revenue streams produced by hit singles across all of Kanye West’s albums, which would add to the approximated total revenue substantially. In order for such a company to be ready for an IPO, Ye would need to do the following:
- Organize a Board of Directors and hire a stable staff and CEO (keeping the organization lean)
- Develop some semblance of a business plan that works around his projects planned for the future
- Complete sales projections for each of these projects over the next fiscal year
- Consult for proper underwriting and develop a preparation plan at least two years in advance of the offering
Overall, the Kanye West Music Company would be made of three brand assets (and derive revenue from the use of each of these assets):
- Kanye West’s Image & Personality Rights
- Copyright of Kanye’s Emotes
- Ownership of Kanye’s Masters (Music)
Let’s quickly walk through each to touch our bases.
Image Rights as Apart of the Artist Company
The projections also don’t take into account the value of Kanye West’s image and personality rights. The right of publicity, often called personality rights, is the right of an individual to control the commercial use of his or her name, image, likeness, or other unequivocal aspects of one’s identity. It is generally considered a property right as opposed to a personal right, and as such, the validity of the right of publicity can survive the death of the individual (Wiki).
Typically, we don’t hear about the ownership of musician image rights as much as we hear about it in the sports world. For example, in 2015, the famed Cristiano Ronaldo, one of the most talented soccer players ever, sold his image rights to Valencia owner Peter Lim. A statement from Ronaldo’s official website reads: “I am very excited to announce my latest deal with Mint Media, owned by my good friend, businessman Peter Lim from Singapore, to acquire my image rights (ESPN). “This is a very strategic move for me and my management team to take the Cristiano Ronaldo brand to the next level, especially in Asia.”
As we can see, image rights can be strategically used to position an individual’s brand, particularly one of great renown and influence, in the same way any corporation’s brand would need to strategize to break into foreign markets. Such an asset is central to an artist’s brand, during life and after death, as it embodies the artist’s likeness as its own service in the marketing world.
The Kanye West Music subsidiary of Kanye West Corporation should own 100% of Kanye’s image and personality rights if it is truly a ‘brand company.’ In doing so, the overall valuation of the company, in tangent with Kanye’s album sales and music royalties, would increase substantially and include all of the artists marketing endorsements as well.
The second brand asset that would be owned by Kanye West Music Company (KWMC) would be that of his copyrighted emotes. Any company (Fortnite, cough cough) that sought to a sell a dance or phrase that Kanye created and popularized, for profit, would need to get a license from KWMC and pay royalties each time the emote was sold through their game.
As a reminder, Copyright is a legal protection for those who create “original works of authorship.” This extends to all images and essentially allows the copyright holder to control the rights to their work. No formal filing or paperwork is required for the existence of this protection: it is protected upon creation (PerformerMag).
The practice of copyrighting emotes is currently non-existent, but as artists (Hip-Hop artists in particular) realize that their contributions to society are being capitalized by third parties, and that no one person can tour the globe forever, we may see an increasing trend in celebrities protecting their emotes from commercial use. Such expressions are undoubtedly a brand assets, but proving the creation of a particular move or phrase can prove quite difficult depending on the emote’s uniqueness and previous use before it was popularized by the artist.
Ownership of Kanye’s Masters
The last brand asset of KWMC would be the ownership of Kanye’s masters. Many artists do not own their own music, particularly in the Hip-Hop industry where 360 deals run rampant. If, in fact, Kanye owns all of his masters, it would be wise to assign ownership of such assets to his brand company, as these assets are central to his brand.
Securitization & Tokenization of the Brand Company
Fractionalizing ownership of the Kanye West Music Company could occur in two ways:
- Traditional Initial Public Offering
- Security Token Offering (Initial Coin Offering)
The issue with traditional IPOs, and the modern day stock exchange, is that they pose barriers to entry for laymen consumers. Brokerage fees, accredited investor policies, slow trade execution and settlement, and difficulty attaining stock certificates after purchase all contribute toward an exclusive and non-transparent market.
In addition, there exists high costs of going public and being public. Underwriting, makes up the largest component of IPO costs by far. Based on the public registration statements of 315 companies, on average, companies incur an underwriter fee equal to 4% to 7% of gross proceeds, plus an additional $4.2 million of offering costs directly attributable to the IPO. Legal and Accounting fees also add up and can increase significantly for larger companies that may face additional complexities in preparing for an IPO (PWC).
In addition to the costs associated with going public — the offering and incremental organizational costs — there are significant expenses related to the process of being public. Most private companies do not have the infrastructure to operate in a public company environment, and to satisfy this new level of regulatory and reporting rigor, many companies will incur a series of one-time and recurring incremental costs associated with being a public company. Two-thirds of CFOs surveyed estimated spending between $1M and $1.9M annually on the costs of being public. When all is said and done, the process of going public via an IPO is made for a mature company that has existed as such for at least a decade or so (PWC).
KWMC would be considered a new company, despite the longevity of Kanye West’s career. It wouldn’t have the staff nor the internal structure, at least initially, to bear the weight of an IPO process without outsourcing the majority of the work — which could exponentially increase the expenses of going public. In addition, the success of an IPO is determined by investment analysis on the street, which isn’t known for its inclusivity or constructiveness.
Rather, an ICO seems more appropriate. Of course, the nature of a security token offering has changed since 2017. KWMC would need to take into consideration the crowdfunding regulations and climate surrounding the security token ecosystem. For a security token sale, there are several factors to take into consideration:
- Amount of Financing Raised
- Amount of Participants Engaged
- Liquidity of the Tokenized Asset
- Complexity of the Token Sale/Registration Costs
An Initial Brand Offering should look to maximize the amount of financing raised and the amount of participants engaged, particularly participants that are already familiar with the brand in the commercial space (i.e. fans of Kanye West). The liquidity of the tokenized asset, a company that owns Kanye’s masters, image rights, and copyrighted emotes, would be strong (in fact much stronger than most security token sales that have occurred since the beginning of 2018). However, given that the goal of the token sale would be to maximize the amount fundraised and the number of sale participants, the registration costs would be rather high. The only available option that KWMC could legally pursue, and maintain its objectives, is to fully register with the U.S. Securities and Exchange Commission (SEC). The option allows for companies to have an unlimited offering size, remain open to all investors (not just accredited investors), have no marketing limitations, and is eligible to Canadian and American issuers.
The estimated cost for full SEC registration would be approximately $1.2M, if we account for 1B tokens to be sold at a maximum price of $10 (an approximate raise goal of $10B).
Price and sale design are an additional element to take into account. The SEC may not be as flexible with regards to price determination, and like most IPOs, KWMC, along with their chosen underwriter, would need to determine a starting price for their tokenized securities before the tokens are issued. KWMC’s IBO model would probably resemble a hybridized approach of market expectations, price modeling, and token distribution that we haven’t yet seen from either the IPO or ICO markets.
Token Target Prices & Fair Distribution Models
Traditionally, IPOs hope to trend toward their pre-selected target price, and the higher the price, the more money the company gets; but if the price is set too high, there won’t be enough demand for the stocks, and the price will drop on the aftermarket (the open financial markets where the stock will be traded after the initial offering). The ideal stock price will keep demand just higher than supply, resulting in a stable, gradual increase in the stock’s price on the aftermarket. This will lead to praise from market analysts, which will in turn lead to increased value down the road (How Stuff Works).
Who gets to buy the shares during an IPO is a complicated matter. In most cases, your typical, individual investor doesn’t get access to these offerings (see The Google IPO to read about an exception). Instead, the underwriter gets to allocate the shares to associates, clients, and major investors of his choosing. Most of the shares (about 80 percent) will go to institutional investors, which are major brokerage firms and investment banks, and a few high-profile individual investors. The remaining shares that do make their way to small-time, individual investors are hard to obtain: Stock brokers usually only offer access to IPOs to higher volume traders, traders with no history of flipping stocks, and traders with a long-term relationship with the broker (How Stuff Works).
Exclusive access to the IPO stock is a major barrier to entry for mainstream consumers and individual investors, and, by leveraging a registered ICO framework, KWMC’s IBO would empower many consumers to participate in the IBO who would otherwise be incapable of doing so.
As far as price determination, rather than being determined by a few institutional investors, KWMC’s token price could leverage the Reverse Dutch Auction or Interactive Coin Offering models. In the former model, KWMC may vary the % of tokens sold but not the amount of capital raised and they can start the auction at a very high valuation. In the latter model, buyers place bids and have a maximum sale valuation they are willing to participate at and buyers can withdraw bids based on the behaviors of other buyers during a specified time period. Overall, the Interactive Coin Offering model is seen as ‘the most fair’ by Vitalik, but either can be leveraged to best align with KWMC’s goals.
So where does this bring us? Let’s compare the traditional IPO to the IBO hybrid model:
As we can see, the make-or-break attributes of a potential IBO, in contrast to an IPO, lie within the execution of the token sale itself, or its Ease of Participation, and the offering’s asset liquidity. The Ease of Participation refers to the token sale’s interface that investors interact with — simply put, the application that a consumer uses to invest should have exceptional user experience and require as little knowledge as possible to leverage. The liquidity of a sale equivocates to how easy, or difficult, it is for investors to purchase and sell back their security tokens at any time they’d prefer.
For an IPO, ‘liquidity’ means that the stock is trading in an open market, and thus the stock is, more or less, easily exchangeable for $USD (i.e fiat currency) and vice versa. For a SEC registered, securitized token, there aren’t any legitimized exchanges (yet), so ‘liquidity’ means the throughput of supply and demand between traders at any given time for that one securitized asset. We could reasonably assume that the more popular the tokenized brand, the more liquid it is as an asset, given that there will be more potential investors interested in participating in the IBO and subsequent trading in an open market.
Now We Have DONDA Tokens (DND)
After corporatizing Kanye West’s brand into a company that owns his masters, image rights, and copyrighted content and registering the company’s securities with the SEC in preparation for an Initial Brand Offering, we have created the foundation for offering legally securitized DONDA (DND) tokens to the public. Of course, we can’t stop here. Now we need to develop a mature interface to host the securitized token sale in a way to leaves the cryptocommunity’s bad UX habits behind and begins to create space for a decentralized brand exchange.
Part III analyzes what would be necessary to host and IBO to ensure that our securitized token sale will go well.
If you made it this far, you might as well read it 😂.
Initial Brand Offering was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.