The Offering Process

The REX Royalty Process
for Offerings
by Chinese Royalty Issuers

The China Royalty Exchange will apply a systematic screen, in order to identify appropriate issues of royalties, establish the eligibility of companies for a public listing of their royalty contracts, and define the continuing responsibilities of issuers, investors and members of the financial community to the Exchange.

Following is a general description of the screening process, the listing process itself, and the ongoing management of trading activity on the Royalty Exchange.

keyboard-chopsticks-web1. Amount of offering: The amount of funding sought by the royalty issuing enterprise must first be reasonable. Factors considered include current and past levels of business revenues, conservatively projected future revenues, market positioning and competitiveness, and quality of management.

2. Structuring the offering: Using the publicly available REX Royalty Financing Calculator, the projected revenues and royalty payment rates are studied and adjusted to create a fair and attractive return to the investors purchasing the royalty.

a. The data provided must include the amount of financing sought, revenue projections for the current year and for two following years, assuming the receipt of the financing, proposed royalty percentage to be paid, and an estimated compound annual growth rate (CAGR) for the balance of 20 years.

b. The CAGR may change in multi-year stages over the 20 years, and the royalty rate may also be changed in multi-year stages.

c. Optional additional data may include the current Price-to-Earnings Ratio (PE), the Net After Tax (NAT) profits, expressed as a percentage of total revenues, and a benchmark comparable fixed interest rate, so that royalty returns can be compared to other investments providing fixed returns.

d. The model will display detailed Internal Rate of Return tables (IRR), flow of royalties, both gross and cumulative, details of yield, rate of return, projected growth of market capitalization, with some charts that aid in visualization of the data.

e. Using this tool, the investor or more likely the underwriter representing investors and the company seeking to sell a royalty may negotiate mutually-acceptable terms. For an example of a possible investment on reasonable terms through the Royalty Calculator, see and click Data Entry. A sample set of data is available. You may view this model by entering the username sample, with the password sample, the email address and project name Sample. This information is for a 20-year royalty investment of 64 million yuan in a Chinese company — a little more than $10 million US at current exchange rates.

3. Placement or distribution of the royalty: Once the terms of the royalty offering are agreed, the royalty issuer (the company) will contract with an agent, which may be an investment banking or other financial intermediary firm, to present the investment opportunity to prospective investors.

a. The agent of the royalty issuer will assist the royalty issuer in preparing a prospectus using Exchange-supplied guidelines and standards, containing the revenue analysis and recommendations based on the model, regarding the amount and/or terms of the offering.

b. In the event the agent is not able to attract investors based on the terms negotiated with the issuer the agent will recommend to the issuer terms which the agent believes will be acceptable to investors.  As the agent will likely receive a fee or commission, largely based upon the completion of the offering, the agent will try to balance the wishes of the prospective investors who have reviewed the investment opportunity, and those of the company offering the royalty.

4. Commitments of the royalty issuer: The royalty issuer must agree to:

a. Provide timely information, annually audited, as to the amount of revenue received for the provision of goods and services. The royalty issuer will also issue quarterly revenue statements and agreed information about the activities and prospects for the company. Each listed company will invite its royalty investors to an annual presentation, as required by the Royalty Exchange, to ensure transparency and answer questions from the investment community.

b. Make royalty payments, as agreed in the contract. The Royalty Exchange directly or by contract with others will receive the percentage of revenue specified in the royalty agreement, by special arrangement with the issuer’s designated bank(s) receiving issuer revenues. Royalty payments will automatically be sent from the Exchange or its agent to the investor at the required intervals — for example, quarterly.

5. Expenses to be paid by the royalty issuer:

a. REX fee –  A fixed fee for reviewing the data and approving the structuring of the transaction. In addition, there will be a continuing fee for so long as the royalty is outstanding, to cover costs of translation, legal and tax review, submitting audit reports and records to China Securities and international reporting as required.

b. Underwriting or placement fee, paid to the organization providing the investors purchasing the royalty.

c. Royalty payment collection and distribution fee. Includes cost of currency conversion and transfer of funds to international accounts to and from China, if necessary.

d. Fee for distribution of official revenue reports and other company status information to registered royalty holders and the public

e. Trustee or administration fee in the event a mechanism for the protection of investors must be used if the royalty issuer fails to comply with their legal obligations.

f. Brokerage fees paid by transaction participants when a royalty contract is bought or sold on the exchange, after its issue, among open market buyers and sellers. Includes cost of international transfer of ownership.

Arthur Lipper, Chairman
British Far East Holdings Ltd.
March 2, 2013

with the assistance of Michael North