The Investor Was Ready to Hand Over the Money…But the Artist Wasn’t In a Position to Take It

I’ve been an entertainment lawyer for 27 years, and I’ve seen a lot . A lot. I’ve Seen This Before is my Friday series that gives you a peek at some of the lessons my clients have learned the hard way. Some of the details may have been changed to protect client confidentiality.

The industry has changed so much over the years. Artists who used to be determined to get a record deal have discovered that they can keep more money and control if they go it on their own. More and more artists are working successfully with that model, since direct access to fans is so much easier than it has ever been.

Sometimes—most of the time, actually—those same artists have cash flow problems. They solve that problem by trying to attract investors. Investors can bring the capital they need in return for a portion of the revenue as they grow.

I’ve seen dozens of clients use that model successfully. However, this is one of those situations where creativity meets business. Investors are business people. They want to see structure.

The artist I want to talk about this week was in exactly that position. He had an investor who was interested in putting money into his career. He had a released several singles. He had a small but growing following on Spotify. He had a catalog of songs that only needed studio time to be turned into reality. The investor believed this artist could turn his talent into money.

Meanwhile, the artist had tried to manage his business the right way. He had formed an LLC, and he operated everything through his business—he had a bank account, he had  used the company to pay expenses, and he had deposited all of his revenue in the company account. Now that the investor was interested, the artist was sure he could just sell off a piece of his business, and they would be ready to start recording.

A Very Common Snag

The investor did what all business people do—he insisted on a contract. And in that contract, the artist had to confirm that the business owned the rights to the assets (in this case, the master recordings and compositions).

Of course it did, right?

No, not exactly.

The Artist Owned the Music. The Company Didn't.

The problem wasn't that someone else owned the copyrights—the artist. He had written the songs and recorded the music. He owned the copyrights. And he had never done anything to transfer those rights into the company.

The artist and the company aren’t the same thing. They are distinct legal entities. And the investor wasn’t investing in the artist—they were investing in the company.  The company was being asked to attest that it owned assets that had never actually been transferred to it. That meant the investor could have invested in the company only to have the artist exhaust the funds and place the copyrights somewhere else. No one thought that would actually happen; but investors are not going to take that risk.

That wasn’t a big deal on its own. We could just transfer the assets.

But That Had Ripple Effects

The next step was to transfer the copyright registrations. But, as is very common with artists starting out, there weren’t any. That didn't mean the artist didn't own the songs. Copyright ownership generally arises when an original work is created and fixed in a tangible form, not when a registration is filed.

But it did create another problem. There were now years of works that needed to be addressed. Doing all of that at once, on the back end, was going to cost considerably more than handling the registrations properly as the music was being created and released.

"We'll Register It Later" Can Get Expensive

Copyright registration isn't terribly expensive when you're dealing with one registration.

But artists don't create just one song. They create catalogs. One song becomes five, then twenty, then fifty. Recordings accumulate too.

And depending on the circumstances, there are opportunities to use group registration procedures or otherwise organize filings efficiently when copyrights are handled at the appropriate time. Ignore registration for years, however, and eventually you may be staring at an entire catalog that needs to be cleaned up. Now you're not talking about one filing fee. You're talking about many of them.

The filing fees alone can be substantial. And that's before paying anyone to sort through the catalog, determine what needs to be filed, identify the correct claimants and authors (who the artist may not have been in contact with for years), gather publication information, and prepare the registrations. What could have been routine maintenance became a significant project.

That's what makes this story frustrating. There wasn't some complicated copyright dispute. No one had stolen the songs. No one was challenging ownership. The artist simply hadn't done the paperwork as he went along.

If the copyrights had been handled properly from the beginning, the cost would have been spread over time and, where available, filings could have been structured more efficiently, which would have dropped costs substantially.

Instead, an investment opportunity arrived and suddenly years of housekeeping had to be done at once. That's a much more expensive way to run a business; it also meant a chunk of the investment the artist thought would be spent on recordings were about to be taken for legal fees.

Investors Expect Ownership In Return for Money

From the artist's perspective, the ownership situation seemed obvious. They own the LLC and they wrote the songs, so that’s good enough.

From the investor's perspective, that's not enough. An investor wants to know what the company they're investing in actually owns. If the value of the business depends on a music catalog, the investor usually wants evidence that the catalog is actually an asset of that business. And they won’t turn over the funds until title is confirmed.

Forming an LLC Doesn't Transfer Your Copyrights

This is the part many independent artists miss. You may form an LLC, open a business bank account, and put your touring and streaming revenue into that account. Then you may use that account to pay your expenses. None of those things necessarily transfer copyrights you personally own into the company.

If the LLC is supposed to own the catalog, then ownership needs to be secured. Otherwise you may own two things: the company and, separately, the copyrights. That's very different from the company owning the copyrights.

The Investment Changed the Landscape

Before the investor arrived, the main concern was the artist’s control of his music. Once there was an investor involved, the concern shifted. Now, the investor wanted assurances that he was buying an interest in a company that owned assets. He wanted proof. And he was right to want that.

And it's a concern that every artist trying to build a business around intellectual property eventually needs to bear in mind.

What Due Diligence Does

“Due diligence” just means that an investor will conduct an investigation into what they are buying before they buy it. They want to confirm that what they are buying is what they think it is—kind of like taking a used car to a mechanic to make sure it is solid before you buy it.

I’ve managed more due diligence procedures than I can even remember. And due diligence always has a way of finding things nobody worried about before. That is when the investor starts asking the hard questions: Where are the copyrights? Are there other songwriters? Where are the songwriter agreements? Have the songs been registered with a PRO? Recording agreements? What about producer or mixer agreements? Any licenses outstanding?

None of those questions means something is necessarily wrong. They simply want to know what they are investing in. That’s a reasonable question when someone is about to put their money at risk.

Fortunately, This Was Fixable

The good news is that this isn’t a conflict situation. It’s a time and money situation. We were able to transfer the appropriate rights to the company. We were able to work through the copyright registrations and prepare the right agreements.

But it cost the artist a substantial amount of money, and it meant the investment they wanted right now was delayed while we worked through the process. I’ve actually had that happen numerous times—we frequently have to push the transfer of funds until we can sort out the missing paperwork. Sometimes it’s a few weeks, sometimes it’s months.

And it can be avoided with a little diligence along the way.

The Real Lesson

The artist hadn't completely ignored the business side of music. He had formed a company and used the company bank account. He had worked hard and created something valuable enough that someone else wanted to invest in it.

On the other hand, there's a difference between forming a music business and maintaining one. Registrations and transfers don’t feel urgent when you're releasing your first song. Or even your second. But as you catalog grows, the paperwork backlog gets bigger and bigger.

If you stay ahead of it, you’ll be ready for that investor when the time comes. If not, you may find yourself spending those investment funds on paperwork instead of music.