Top artists have made headlines for striking music rights deals with deep-pocketed investors who acquire their music publishing and recording rights. Over the past two years, Bruce Springsteen, Stevie Nicks, Bob Dylan and Shakira, among others, have made such arrangements. But artists who crave cash and want to capitalize on exorbitant prices for their music rights have resisted selling their life’s work.
A music catalog monetization structure called “RECAP” (Artist Retained Equity in Catalog With Assignment of Proceeds)1 has been developed, which effectively gives artists the best of both worlds: a large upfront payment and retained legal ownership of their catalog. Unlike traditional catalog agreements where legal ownership passes to the buyer, in a RECAP the artist retains full legal ownership of their catalog, and economic ownership automatically reverts to the artist at the end of the contract.
A Closer Look at Music Catalog RECAPs
Traditionally, artists seeking to monetize their music publishing or recording rights had two options: (1) sell their catalog and lose ownership and control of their works, or (2) finance their catalog through debt and assume minimum debt service payments and related funding risks. (for example., risk of default, foreclosure and sometimes personal liability).
In a RECAP, however, an artist receives a lump sum cash payment from an investor (such as a private equity firm) in exchange for allocating future product from the artist’s catalog for a predefined period. Unlike a loan, the artist is not required to make any interest or principal payments, so there is no risk of default or foreclosure. Instead, the artist retains the same legal ownership and control over the catalog assets (including any intellectual property rights therein) as before the transaction, and rights to the catalog proceeds. automatically revert to the rights holder at the end of the contract term.
To justify the risks as well as the transaction and opportunity costs, particularly given that a RECAP does not typically require artists to tour or promote their catalog, the projected revenue stream from the catalog must be sufficiently important and should have an impact on the duration of the agreement. Accordingly, a RECAP is more appropriate for large catalogs with popular, profitable songs and/or established artists with a history of strong catalog sales. The higher the projected net present value of the catalog product at the time the parties enter into the agreement, the greater the potential lump sum payment to the artist. Since the artist retains ownership of the catalog assets, the payment will not be as large as if they had sold the catalog, but many artists see this as a fair trade-off for not selling their life’s work. .
The key elements of a RECAP are negotiated artist by artist but generally include:
- Ownership of rights retained by the artist. The main appeal of a RECAP for artists is that it does not require rights holders to relinquish any equity or legal ownership of their catalog. Only the relevant catalog products, not the underlying catalog assets, are assigned; the right to receive these receipts automatically reverts to the artist at the conclusion of a RECAP (with off-roading as the end of the term approaches to ensure a smooth reversion of payments).
- Catalog product assignment. In exchange for the lump sum payment, the artist assigns to the payer (the assignee) all catalog proceeds attributable to the “exploitation” of the catalog assets during the term of a RECAP. Generally, “catalog product” is broadly defined (for example., digital download sales, synchronization licenses, merchandise, vinyl record sales, public performances, etc.), and “exploitation” includes all known or future technologies, transmission media and distribution methods.
Artists are often required to procure “Letters of Direction” at closing indicating that royalties and other sources of revenue (at least for major labels, PROs and other major contracted parties) be sent directly to the assignee. The usual cooperation clauses (including maintaining letters of direction during the term), “anti-circumvention” provisions and “bad pocket” clauses are designed to protect the assignee to make the initial payment and leave the artist ownership of catalog assets.
- Definition “catalog”. A RECAP may, but does not have to, encompass an artist’s entire body of work. Rather, the catalog may include a selection of works and often excludes future works (subject to certain exclusions such as derivative works relating to the relevant catalog assets). Each agreement is negotiated on a case-by-case basis, including to address the processing of general fee payments, audit proceeds and other extraordinary items that may be received during the term of the contract.
- Long term relationship. RECAPs can be in place for decades, potentially outgrowing the parties that negotiated the agreement. As a result, one of the drawbacks of a RECAP is not knowing who either party will be dealing with later.
- Bonus and Redemption Provisions. In addition to the initial lump sum, artists may receive “bonus” payments if catalog proceeds collected by the assignee meet certain revenue milestones. Additionally, a RECAP could include an artist’s “Redemption Right” whereby the artist can terminate a RECAP early by paying the assignee a redemption price based on a pre-agreed formula or amount.
- Synchronize income. Synchronization rights and licenses can impact a song’s value and/or an artist’s reputation (and therefore materially affect catalog revenue). As a result, whether an artist must agree to sync licenses within certain parameters (or not at all) is often heavily negotiated. Considering timing revenue as part of a bonus structure and/or buyout payment can help align party incentives.
- Protective Provisions. A RECAP has various protective provisions and cooperative agreements to ensure that both parties are treated fairly throughout the duration of the long-term contract. Since the assignee has no ownership interest in the catalog assets, a RECAP obliges rights holders throughout the life of the contract to, among other things, defend lawsuits involving the catalog (for example., allegations of infringement), not transferring or encumbering the catalog, and negotiating favorable terms to maximize the product (for example., renewing and replacing agreements with record labels, PROs, streaming services and other distributors on commercially reasonable – and possibly no less favorable – terms). Artists are prohibited from hindering or otherwise frustrating the assignee’s right to receive catalog product and should generally consult meaningfully with and receive the consent of the assignee before engaging in any activity that may materially affect the catalog. . For example, while artists retain the right to make administrative decisions regarding catalog assets, the assignee must be meaningfully consulted and consent to any agreement that would diminish the revenue they would otherwise receive. The ability of parties to initiate and enforce audit rights is also often negotiated.
- Security provisions. A RECAP contract may include mechanisms to prevent artists from assigning or pawning the catalog to a third party and to provide the assignee with additional protection in the event that the artist goes bankrupt or otherwise fundamentally defaults (for example., artist refuses to pay for catalog proceeds, or transfers or strikes affected catalog assets, etc.). The assignee may require the artist to execute a security agreement and file a UCC-1 financing statement to perfect the assignee’s security interest in the catalog product and notify third parties that the assignee has a first ranking security interest. Such measures prevent artists from pledging record label contracts, or relevant intellectual property rights or catalog proceeds to a lender, which could compromise the assignee’s ability to receive anticipated revenue from the catalog.
Key points to remember
A RECAP can be an attractive catalog monetization structure for artists and other rights holders who want to capitalize on a hot market for music and publishing rights, but don’t want to “sell” to third parties. The structure requires, among other things, a detailed analysis of the legal rights of the holder and the transferee, a delicate balance of contractual provisions aimed at protecting the interests of both parties in the long term and an agreement on the scope of the catalog assets. Rightsholders should consider various other legal issues, including tax structuring, and consult with their business and legal advisors to determine if a RECAP is appropriate for their catalog.
1 RECAP is a registered trademark.