Web Helps Musicians Sell Shares of Royalties

Michal Czerwonka for The New York Times

The songwriter and producer Preston Glass in his studio at his home in Los Angeles.

As a songwriter and producer for stars like Natalie Cole, Aretha Franklin and Whitney Houston, Preston Glass receives a comfortable stream of music royalties. But when he needed to make a substantial investment to embark on the next phase of his career â€" as a performing artist in his own right â€" he had few options to raise the money, he said.

“Me and most writers can’t walk into a bank,” Mr. Glass said in an interview from his home studio in Los Angeles. “Banks don’t understand how songwriting works, how the whole business of royalties works.”

So Mr. Glass turned to the Royalty Exchange, a Web site where musicians can sell parts of their royalty income to investors. He put 15 of his songs on the block â€" including “Miss You Like Crazy,” a Top 10 hit for Ms. Cole in 1989, of which Mr. Glass was a co-writer â€" and raised $158,000. Mr. Glass retains most of his rights to those songs, but will now share part of the income with an investor whenever they are played on the radio or streamed online.

Since it was founded two years ago, the Royalty Exchange, based in Raleigh, N.C., has held 18 auctions, raising about $750,000. But Sean Peace, the company’s chief executive, envisions it as a robust marketplace where musicians can capitalize on their work and investors can find a somewhat exotic asset that could still bring in steady earnings.

“Most musicians have no idea that they can take their royalties and reinvest in themselves,” Mr. Peace said. “If they could get $80,000 up front for selling 50 percent of their royalties, that can be game-changing.”

The music industry is full of bitter stories of musicians who have given up royalty rights for a fraction of their future value. Eli Ball, the founder of Lyric Financial, a competing service that gives musicians short-term advances on their royalties in exchange for a fee, thinks that musicians should not sell their rights.

“It’s too easy for songwriters to sell off an asset that took you a career to build and is going to be gone forever,” Mr. Ball said.

But Mr. Glass said he liked the Royalty Exchange because he could define exactly which rights to sell and which to retain. His sale involved what is known as the songwriter’s share of public performance; it does not cover sales of CDs or downloads, and it does not involve any change to the song’s actual copyright. (He also is a national artist representative for Lyric Financial.)

The intricacies of royalties can be confusing even to many in the industry. But Mr. Peace said his buyers are told what they will and will not receive, and are given at least three years of back earnings reports. For a collection of songs written for R&B acts like Usher and TLC that was up for auction recently, bidders saw that most of the $22,975 in annual earnings was generated by three tracks.

The company takes a 2.5 percent fee from the buyer and anywhere from 5 percent to 12.5 percent from the seller, depending on the size of the deal. It also takes 2.5 percent of future earnings from the buyer, as an administration charge.

Mr. Peace, whose background is in technology, started the Royalty Exchange in 2011 with two others after first trying a similar idea with SongVest, which sold interests in songs as high-priced memorabilia items for fans. But that model tended to work only with big artists, he said, so the Royalty Exchange instead aims at investors with bundles of songs.

The idea of royalties as a salable asset has a mixed record. In 1997, David Bowie raised $55 million by selling a 10-year bond in some of his royalties, with a fixed interest rate. But by 2004 they were downgraded amid industry tumult, and lawsuits over administration fees and other issues marred similar bonds.

The complexity of music royalties is another concern. Michael S. Simon, the chief executive of the Harry Fox Agency, one of the industry’s primary royalty-collecting groups, said that a potential investor needed considerable sophistication.

“You need to understand life of copyright, you need to understand the potential ramifications of legislation that could affect life of copyright, and you need to understand termination rights,” Mr. Simon said. “Those are three things that most people don’t understand, let alone how to predict revenue in the music business.” (Termination rights let authors recover copyrights to their works from third parties after a certain period.)

Martin Diessner, an investor who lives in South Africa who bought about half of Mr. Glass’s offering, said that being an outsider allowed him to spot a good investment where others might see risk.

“The reason why I think it’s less risky is probably because I don’t understand the music industry,” said Mr. Diessner, who is now on the Royalty Exchange’s advisory board. “Everyone who is in the industry sees it from the inside out, while I see it from the outside and maybe don’t have a negative perception.”

Most of the Royalty Exchange’s sales have dealt with the publishing rights of songs, which have to do with songwriting, as opposed to their recordings, which are controlled by a separate copyright. Publishing income has been seen as more stable, but it is also subject to shifts. Last year Ascap and BMI signed a new deal changing the method for how radio companies pay royalties. According to BMI’s most recent annual report, the change has already resulted in a 3 percent drop in revenues.

Mr. Peace said that like any investment, royalties involved risk, and that its buyers were given a significant amount of information for evaluation.

As for Mr. Glass, the sale has helped him buy new equipment for his studio, including a sitar and various vintage instruments, that will help him as he starts a new phase in his career.

“I wanted to be competitive, not only as a producer and writer but as an artist, too,” he said. “I wanted to invest in myself, to be able to use some of the royalties that I have built up, almost like real estate.”

A version of this article appeared in print on April 22, 2013, on page B1 of the New York edition with the headline: Web Helps Musicians Sell Shares Of Royalties.