Royalty Exchange is currently facing a lawsuit for breach of contract from an investor who spent $420,000 on one of the site’s biggest catalog auctions to date, Billboard has learned.
Back in August 2017, songwriter and former economic researcher Ryan Stotland invested $420,000 in acquiring 100 percent ownership of both the sound-recording and musical-composition rights of five albums by rapper King Lil G. The rapper’s former management company, label and publisher MIH Entertainment listed the albums for auction on Royalty Exchange’s website; the catalog, comprising 68 songs in total, generated nearly $360,000 in digital royalties between Jan. 2014 and Jul. 2017, according to financial documents.
But through unusually circuitous means, Stotland found that King Lil G himself had filed his own lawsuit against MIH for misappropriating his royalty revenue, sabotaging his catalog rights and failing to respond to his requests for accounting. This suit had already been pending litigation for four months prior to Stotland’s investment, and was filed with the L.A. Superior Court just four days after Royalty Exchange agreed to list King Lil G’s catalog.
Royalty Exchange claims that they had conducted the proper due diligence on King Lil G’s catalog — including but not limited to checking public records related to MIH — but Billboard has learned through multiple sources that no such due diligence took place. Meanwhile, Royalty Exchange has officially wired $315,000 of Stotland’s initial $420,000 investment to MIH, and has yet to return any of the remaining funds — the normal 15 percent commission for auctions, plus a 10 percent escrow as a security measure — to Stotland.
In January 2018, Stotland and his royalty investment company Otimo Music sued Royalty Exchange, MIH and the latter’s svp of A&R and artist relations Michael Conner for breach of contract, seeking undisclosed damages. Royalty Exchange then filed a motion to dismiss in Mar. 2018, but judge R. Brooke Jackson denied the motion last Thursday (Oct. 11). Veteran music lawyer and Berklee College of Music professor Allen Bargfrede has also been brought on as the plaintiff’s expert witness, according to documents obtained by Billboard.
“Nothing is more important to Royalty Exchange than meeting the needs of both buyers and sellers on our platform,” Royalty Exchange tells Billboard in a statement. “Of the more than 369 transactions we’ve facilitated to date, 40 percent involved repeat buyers, and 60 percent involved repeat sellers or those they referred. These results speak to our commitment to maintaining the integrity of the marketplace. While we cannot comment on pending litigation, we believe there is no legitimate claim against Royalty Exchange, and are confident the issue will be resolved in our favor.”
Stotland’s complaint, and Judge Jackson’s denial of Royalty Exchange’s motion, paint a different picture. Stotland and Otimo are arguing not necessarily that Royalty Exchange acted “knowingly or with an intent to defraud,” but rather that the company “did not perform the due diligence it was obligated to undertake and that it misrepresented its level of due diligence,” and hence that the jury “cannot say that [Royalty Exchange] did not act recklessly as a matter of law,” stated Jackson.
In fact, some suspicious activity that would have likely stopped other potential investment partners in their tracks had already been happening months before King Lil G’s auction was officially listed. Around the time MIH first contacted Royalty Exchange (and shortly thereafter faced a lawsuit from King Lil G), MIH as a whole was not in good legal standing as an LLC in California due to tax evasion, documents show.
Nonetheless, Royalty Exchange still decided to put up the auction for King Lil G’s catalog “to gauge interest,” one source with knowledge of the situation tells Billboard. “It seemed that Royalty Exchange was anxious to get this auction up because they wanted the commission.” Another lawyer source adds that “it was likely that after [King Lil G] sued MIH, the company was just looking for the quickest possible route to a fire sale to get rid of their assets.”
According to the complaint, Stotland first found out about King Lil G’s lawsuit neither from MIH nor from Royalty Exchange in the auction process, but rather from a fourth party — namely Nicholas Jampol, a partner at Davis Wright Tremaine LLP who was serving as counsel for Live Nation at the time — nearly one entire month after wiring $420,000 to Royalty Exchange. (Jampol did not respond to a request for comment by press time.)
Stotland then emailed King Lil G’s counsel about the situation — only to find out that they themselves were also unaware that King Lil G’s own label and publishing company was auctioning off his rights to Royalty Exchange in the middle of a legal dispute.
“Imagine this Mexican kid pouring his heart into his own music in Los Angeles, only to get an unexpected email from an investor in Montreal who thinks they’ve just acquired all of these royalties from him,” one source tells Billboard. “The whole situation is absurd.”
Hence the core crux of Stotland’s complaint is that Royalty Exchange did not perform the proper due diligence as promised — including but not limited to checking public legal records related to the rights holders, as well as contacting the artist directly to verify all rights information and that royalties had been paid properly.
Indeed, public documents confirm that two of King Lil G’s albums listed on Royalty Exchange — Blue Devil Part 2 and King Enemy — were released before the rapper signed his label and publishing deal with MIH, and hence should not have been included in the auction. Furthermore, only 38 out of the 68 tracks in the auctioned catalog were registered with SoundExchange under MIH. The remaining 30 tracks were under other record companies, including PR Records and Double 9 Records. Bargfrede’s report suggested that Royalty Exchange only reviewed the first page of such royalty statements from SoundExchange in its due diligence process, which for such a substantial catalog was insufficient.
Finally, MIH contracts reveal conflicting agreements with Live Nation and Select-O-Hits (a subsidiary of The Orchard), both of which had agreed to license the same King Lil G material from MIH for exclusive YouTube distribution. “RX does not seem to have taken steps to reconcile or understand this contradiction anywhere in their due diligence,” writes Bargfrede.
Part of what may have complicated the due-diligence process for Royalty Exchange is that MIH serves as King Lil G’s record label, publisher and artist management company simultaneously. This “presents an inherent conflict of interest for due diligence because MIH and [Michael] Conner were not able to provide an independent assessment [of royalty payments] on behalf of the artist,” Bargfrede writes. (Bargfrede declined to comment for this story.)
In response to complaints around due diligence, a company rep tells Billboard that Royalty Exchange is “a marketplace, not a broker. We don’t represent the seller.” Moreover, contrary to Bargfrede’s suggestions, “the size of the catalog doesn’t change anything with respect to our due diligence process,” says the rep. “It’s more about the manner of rights that are made available. As those different moving parts are added, we add the appropriate documentation on the site.”
The rep also points Billboard to Royalty Exchange’s terms of service, which state that the company “cannot guarantee the completeness or accuracy of any information presented on any of its pages,” and that investors “have the sole responsibility to examine all information concerning the investment opportunities on the Site” and “will make an independent evaluation of the investment opportunities.”
King Lil G has still been performing frequently over the last year, and is about to launch his next tour on Nov. 1 with fellow rapper Rittz, according to the former’s Facebook page. Sources tell Billboard that King Lil G is handling the tour independent of MIH’s involvement and that MIH is now claiming to be defunct as an organization.
According to public documents, the earliest trial date for Stotland’s lawsuit against Royalty Exchange will be June 17, 2019. The lawsuit comes hot off the heels of a series of high-profile private syndicate offerings that Royalty Exchange launched this year with Cage the Elephant and Dire Straits. A company rep tells Billboard that third parties handle all negotiations and due diligence for private syndicates, as they are handled outside the company’s normal auction house.
Back in November 2017, Royalty Exchange had announced plans to launch an IPO, under subsidiary Royalty Flow, that would allow private investors to purchase shares in royalties from parts of Eminem’s catalog. The IPO was suspended in April 2018 due to wider controversies around Regulation A+.
At large, Stotland’s lawsuit against the company underscores some industry skepticism with regards to Royalty Exchange’s marketplace model for royalty investments.
“Broadly speaking, you’re enabling the sale of a sophisticated asset to retail investors who probably don’t completely understand the asset or the due diligence process,” one legal source tells Billboard. “Royalty Exchange’s business model is predicated on the assumption that they are doing that due diligence for you. This lawsuit highlights some potential problems with that kind of market and business model.”