Royalty Entitlements are a new financing model, quite different from both equity and debt financing. Instead of sharing ownership or assuming debt, a company pays a simple percentage of its gross revenue to investors.
Royalties overcome inherent limitations in both the equity and debt models — restrictions observed by its inventor and champion, Arthur Lipper, in his 50-year career as an investment banker, financial exchange member and advisor, editor, author and lecturer.
Some of these limitations are:
- Equity can be a long, slow and risky process for producing investor returns, and it imposes ownership and control burdens on the company.
- Debt or bond financing yields limited upside for the investor, and imposes restrictions on the company, often in the form of conditions on how proceeds may be used.
Both models inhibit the growth and creativity of business. Royalty entitlements offer an alternative, which may be better than equity or debt for some companies.
“The true measure of a company’s progress is continuing growth of revenues, as it is only increasing revenues which reflect customer satisfaction. Profits benefit the owners and managers of a business, whereas increasing revenues demonstrate that the company is providing a valued service and products to the people.” …Arthur Lipper
A royalty contract commits the company to pay a simple percentage of its gross income to the investor, as income is generated. As the company succeeds in expanding its revenues, the investor’s return increases. Royalty entitlements can be structured to scale back the royalty rate, or phase out investor returns entirely, once certain financial objectives have been met.
There are many intriguing details to Mr. Lipper’s method; it is a thoroughly-reasoned system, and has been awarded a United States Patent. A proprietary formula, with a few simple steps, shows the rate of return and other key factors, and is available to the public at no charge on a public website.
Mr. Lipper has also brought the simple one-to-one concept of a royalty contract to the next level: a public Royalty Exchange, in which companies list their contracts with a regulated securities body. China is an ideal place to deploy such an Exchange, because of the large number of businesses seeking capital to grow, its welcome of certain kinds of international investment, and its growing status as a world financial capital.
A China Royalty Exchange will provide monitoring, control, audit, holding and disbursement services to investors. All royalty contracts will be available for sale on an open electronic marketplace at any time, and their value would increase as companies perform and deliver income. Discussions with banks, exchanges and government regulators in China have begun.
For China, creating a Royalty Exchange is a major step forward. It will be a strong new channel for financing China’s growth, both from domestic and international sources, and continues to establish China as a major center of financial innovation.