|Frequently asked questions regarding royalties|
A: A royalty is a defined share of the royalty issuer's revenues.
Q: Why do companies and project managers issue royalties?
Q: Are royalties new?
A: No. Royalties have been used for hundreds of years where one party wished to share revenues with another party who was doing something useful to the royalty payer or issuer. Royalties were traditionally used in commerce where the definition of profit was either difficult to determine or not chosen to be revealed.
Q: What are the advantages for the investor over buying shares or lending a company money?
A: The investor is not concerned with or impacted by the issuer's profitability for so long as the issuer meets royalty payment obligations. The royalty owner benefits when the revenues of an issuer increase.
Q: What are the investor's disadvantages in owning royalties versus shares or debt?
A: The royalty owner does not own an interest in the assets of the company and does not have a right to vote or influence management.
Q: Why would an investor prefer to own a royalty?
A: Because it is generally thought to be easier to predict a trend of a company's future revenues than the level of profitability. Also the royalty owner is unconcerned with the management's discretionary aspects of profit reporting, including executive compensation and decisions impacting profits.
Q: Can royalties be secured and protected in case the issuer has to be reorganized?
A: Yes, if there is an agreement providing asset-based protection or third party guarantees to the royalty owner.
Q: Are royalties negotiable and can they be traded?
A: Yes, royalties can be traded, unless otherwise agreed between the issuer and royalty owner. However, at the present time there is no organized exchange or market place for trading of royalties. It is expected that in the future there will be Exchange Traded Royalties (ETRs).
Q: What is the tax consequence for royalty issuers and owners?
A: Different tax jurisdictions have different regulations. In some of the major areas the issuer is able to deduct the payment of royalties and the royalty owner receives income.
Q: How often are royalties paid?
A: Royalties are paid as per the agreement reached between the issuer and the royalty owner. Royalties can be paid annually, quarterly or daily.
Q: How is the royalty percentage of revenues or rate determined?
A: By negotiation at the time of acquisition.
Q: Is the royalty rate the same for the entire period of the royalty?
A: The rate of royalty payment can be negotiated to adjust on agreed events during the course of the royalty payment period.
Q: For how many years must the issuer pay the royalty?
A: The term of a royalty is negotiated at the time of acquisition. To be attractive to investors the shorter the royalty payment period the higher should be the royalty rate.
Q: Are there commissions and fees associated with royalties?
A: Yes, depending on the terms of the royalty payment agreement and if the royalty was purchased directly from the issuer or through a broker. Also there will be fees if the royalty owner is represented by an organization collecting and distributing the periodic royalty payments and providing other services.
Q: What information regarding revenues and operations must the issuer provide?
A: The level and timing of information regarding the revenues and operations of the issuer are determined by the royalty payment agreement. In many cases an annual audit of revenues will be required by the royalty owners, unless a full audit is provided.