Music Royalties, Crowdfunding, and Retail Investors: Opportunities, Risks, and Barriers in the United States

Abstract

Millions of new brokerage accounts were created by retail investors as investment interest spiked in 2020. This spilled over into niche alternative assets such as “investments of passion” which include assets like art, wine, and collectibles. Investment platforms for this group became mainstream as they began to be used by hundreds of thousands to millions of retail investors. One asset class that has been neglected within this group, both academically and commercially, is music royalties, something surprising given the large role music plays in many retail investor’s lives. While equity retail investors have been studied at length, with a consensus that such investors usually underperform the market, little research exists on music royalties or how retail investors interact with them. To explore the policy area of how to improve US retail investor outcomes and options, this thesis conducts a deep dive into music royalty investing. It hypothesizes that music royalties are an effective but inaccessible asset class for retail investors. Furthermore, this thesis hypothesizes that crowdfunding can be a viable means to make it more accessible by reducing minimum participation costs. This thesis examines the average performance of royalties in normal and recessionary events (such as the Great Financial Crisis and Coronavirus Pandemic) to conclude that royalties are a high-yield market hedge. After examining specific benefits, risks, and trends that are associated with music royalties (such as copyright infringement and digitization), the thesis suggests that royalties are a great match for retail. A deep dive into the current options for US retail investors to invest then shows that most options require minimum capital investments well beyond the means of the average American. After analyzing crowdfunding exemptions that were created with the 2012 JOBS Act, this thesis evaluates a theoretical implementation of a music royalty focused crowdfunding portal. By estimating potential retail demand, royalty supply, and various potential risks, this thesis concludes that crowdfunding can be a viable means to improve retail access to music royalties since it would significantly lower the minimum participation costs. Overall, this thesis evaluates music royalties and crowdfunding to provide guidance on how to increase retail access to music royalties with a goal of increasing investor options and outcomes. The potential identified is exciting because the familiarity of music can provide an edge to some retail investors who are disadvantaged or struggling in other markets. While limited data and literature made this research difficult, it is exciting to contribute to a nascent field that will attract more academic and commercial attention as music royalties and alternative assets as a whole receive more popular attention and investment.