Tokenizing a Music Catalog
Is the Token a Note or an Equity Interest?
Ask a sponsor whether a tokenized royalty offering is debt or equity and you get a fast answer. Ask what happens if a court disagrees, and the room goes quiet.
The question is not academic. The same kind of music catalog has been sold to American investors both ways, in two deals that are a matter of public record, and the legal consequences ran in opposite directions.
Two real offerings, one asset class, two instruments
The catalog sold as debt
In 1997, David Bowie raised $55 million against the royalty income from 25 albums recorded between 1969 and 1990, covering 287 songs. Prudential Insurance bought the entire issue. The paper carried a 7.9 percent coupon and a ten year term, and Bowie kept the copyrights to the compositions. Moody’s rated the notes A3 at issuance.
That is a note. Fixed rate, fixed maturity, one institutional buyer, and a borrower who kept the asset and pledged its cash flow.
It also aged badly. Moody’s put the notes under review in May 2003 as recorded music sales fell, cut them to Baa3, and the deal was retired in 2007. The catalog underperformed and the noteholder absorbed it.
The same economics sold as equity
Twenty years later, Royalty Exchange formed a company called Royalty Flow to hold music royalty streams and sell shares to the public. Its first asset was the Bass Brothers’ production share of Eminem’s catalog, specifically 25 percent of the royalties paid to FBT Productions on studio albums released between 1999 and 2013, acquired for $18.75 million.
Royalty Flow filed under Regulation A+, sought between $11 million and $50 million, priced Class A common stock at a $2,250 minimum for 150 shares, and planned a Nasdaq listing. Shareholders would receive dividends tied to catalog performance.
That is equity. No maturity, no coupon, no promise that capital comes back, and a residual claim on whatever the catalog produced after expenses.
The offering never closed. Nasdaq revoked the conditional listing approval it had issued months earlier, and the company canceled the IPO in April 2018.
What the pairing shows
Same asset class. Same underlying economics, which is a stream of payments generated by recorded music. Two different instruments, two different bodies of securities analysis, and two different sets of investor rights on the day something goes wrong.
Tokenizing either one would not have changed a single element of that. Recording ownership on a ledger changes the format of the interest, not the obligations attached to it, which is the same point that governs every tokenized structure I work on.
Both are securities, so why does the distinction matter
Sponsors sometimes stop at the conclusion that a royalty token is a security and treat the rest as drafting detail. That is where the money gets lost.
A note and an equity interest are both securities, and they are different securities. The differences show up in five places that matter to a real deal.
Disclosure obligations diverge. A debt investor needs coverage ratios, the priority of the claim, what secures it, and what happens on default. An equity investor needs residual value analysis, fee load, and dilution. An offering document written for one audience and sold to the other is a disclosure problem regardless of how accurate the numbers are.
Priority diverges. In an insolvency, the noteholder is a creditor and the equity holder is behind every creditor. Sponsors who market a fixed yield and then deliver a residual claim have investors who believe they are first in line and documents that put them last.
Tax diverges. Interest and distributions are taxed differently, withholding on foreign holders works differently, and original issue discount rules can apply to a discounted note in ways nobody modeled.
Transfer analysis diverges. Holding periods, tacking, and the resale path under Rule 144 are not identical for debt and equity, and the transfer restriction layer in the token has to encode whichever one actually applies.
Smart contract logic diverges. Debt pays on a schedule until principal is retired. Equity pays whatever is left after a waterfall. Those are different programs, and multi class waterfall structures are where tokenized offerings break most expensively.
Why a royalty note cannot escape the Reves presumption
If the instrument is called a note, the starting point is not Howey.
In Reves v. Ernst and Young, the Supreme Court held that every note is presumed to be a security. The presumption is rebutted only by showing that the note bears a strong resemblance to a judicially recognized category that sits outside the securities laws: consumer financing notes, notes secured by a home mortgage, short term notes secured by a small business lien or by accounts receivable, character loans to bank customers, and notes formalizing open account debt in the ordinary course of business.
The Court set out four factors for testing that resemblance. What motivated the parties, meaning whether the seller is raising capital and the buyer is seeking a return. How the instrument is distributed, and whether it trades to a broad segment of the public. What the investing public reasonably believes it is buying. And whether some other regulatory scheme or risk reducing feature makes securities law protection unnecessary.
Run a tokenized royalty note through that. The issuer is raising capital against a catalog. The buyers are seeking yield. The plan of distribution is a public token sale, which is about as broad as distribution gets. Buyers understand themselves to be investing. And there is no alternative regulatory regime covering music royalty paper.
The note fails every factor and resembles none of the exceptions. It is a security, and no drafting choice moves it.
When the label and the cash flow disagree
The harder problem is the structure that calls itself debt and behaves like equity.
I see a recurring pattern. The token is labeled a note. It carries a stated rate. Then the offering documents say payments are made only to the extent royalty receipts are sufficient, there is no maturity date or the maturity extends automatically, the claim is subordinated to everything, and there is no collateral beyond the royalty stream itself.
That is not a note. It is a participation in a profit sharing arrangement wearing a note’s clothing, and the Securities Act reaches it directly through the enumerated categories in Section 2(a)(1), which cover an evidence of indebtedness and a certificate of interest or participation in a profit sharing agreement as separate things.
Recharacterization risk runs in several directions at once. A bankruptcy court can recharacterize purported debt as equity and drop the holder behind real creditors. The IRS runs its own debt versus equity analysis and can deny interest deductions. And an investor who was promised a fixed return and received a residual one has a disclosure claim that does not depend on either of those outcomes.
The fix is unglamorous. If the instrument is debt, give it a maturity, a payment obligation that exists whether or not royalties arrive, and a remedy on default. If it cannot carry those features because the catalog cannot support them, sell equity and describe it as equity. What the instrument is called almost never determines the rights it carries, and the gap between a token’s label and its actual priority is the most common structural defect I see.
What the token layer has to encode
The characterization decision is not finished when the offering document is signed. It has to survive contact with the code.
Payment logic has to match the instrument. A note with a fixed schedule and a residual waterfall are different programs, and a smart contract that distributes pro rata after expenses is describing equity no matter what the subscription agreement says.
Valuation has to be honest about what backs the instrument. Catalog income declines, shifts across platforms, and moves with licensing activity. Debt needs a coverage cushion against that volatility. Equity needs a defensible method for marking the interest when there is no continuous market, which is a documentation question long before it becomes an accounting question about illiquid tokenized interests.
Transfer controls have to enforce the resale rules that actually apply to the instrument chosen, not the ones the platform ships by default.
The current market runs on exactly this infrastructure, without tokens. KBRA rated notes issued by Lyra Music Assets in August 2025 against a catalog valued at $2.95 billion as of March 31, 2025, through a master trust that can issue additional series. Rated debt against music royalties is an established product with established documentation. A token version has to meet the same standard, and investors who can buy the rated note will ask why yours is structured differently.
What This Means for a Catalog Deal
Decide what you are selling before you decide how to issue it.
If the catalog produces predictable income and you can commit to paying on a schedule whether or not a given quarter delivers, you are issuing debt. Document it as debt, give the holder a real remedy, and expect the Reves analysis to conclude that it is a security anyway.
If the income is too variable to support a fixed obligation, you are selling equity. Say so. Build the waterfall, disclose the residual risk, and stop describing the offering with a yield number that implies a promise you have not made.
The structure that causes trouble is the one that splits the difference, because it gets tested twice. Once by the investor who expected a fixed return, and again by a court or an examiner asking what the instrument actually is. Bowie’s noteholder absorbed a catalog that underperformed and had no basis to complain, because the structure was honest about what it was. Royalty Flow’s investors were told they were buying equity in a company holding a royalty interest, which is also honest, and the offering failed for listing reasons rather than characterization ones.
Both of those are better outcomes than a token that cannot answer the question.
Before You Choose the Structure
The characterization question is cheap to answer before a raise and expensive after one. A review of the actual payment terms, the collateral if any, the maturity if any, and the marketing language will tell you which instrument you are issuing and which exemption it can qualify for. If you are structuring a tokenized royalty or catalog offering and want that assessment run against your specific terms, contact me to work through the instrument analysis and the exemption your deal can actually support.
If you are exploring a tokenized asset offering, book a call with Jason Powell to discuss the securities structure, offering exemption, investor rights, and tokenization framework for the transaction.
Frequently Asked Questions
Is a tokenized music royalty interest a security?
Yes, in essentially every structure sold to investors. If it is labeled a note, Reves presumes it is a security and the recognized exceptions do not cover royalty paper. If it is an equity interest or a share of royalty receipts, it is a security under Howey or as a participation in a profit sharing agreement. The token format does not change the answer.
Is a tokenized royalty stream a note or an equity interest?
That depends on whether the issuer owes payment regardless of collections. A fixed rate, a maturity date, and an obligation to pay whether or not royalties arrive point to a note. Payment only when receipts allow, no maturity, and a residual claim after expenses point to equity, whatever the document is titled.
Does the Reves family resemblance test apply to royalty tokens?
It applies whenever the instrument is a note. Reves presumes every note is a security unless it strongly resembles one of the recognized exceptions, which cover consumer loans, home mortgage notes, short term secured business paper, character loans, and open account debt. A royalty backed note sold broadly for yield resembles none of them.
Can I call my royalty token debt if payments depend on streaming revenue?
Calling it debt does not make it debt. When payment is contingent on collections, there is no maturity, and the claim is subordinated with no collateral, a bankruptcy court can recharacterize it as equity and the IRS can deny interest treatment. An investor promised a fixed return who received a residual one also has a disclosure claim.
Why does note versus equity classification matter if both are securities?
Because the consequences differ. Disclosure content, priority in insolvency, tax treatment, resale analysis, and the payment logic written into the smart contract all change with the instrument. An offering drafted for one and sold as the other creates exposure that is unrelated to whether you correctly concluded a security was involved.
What exemption can a tokenized music catalog offering use?
The usual candidates are Rule 506(b) and 506(c) for private raises, Regulation A+ for public offerings up to the Tier 2 ceiling, and Regulation S for offshore sales. Royalty Flow used Regulation A+. The right answer depends on investor base, marketing plans, and whether you need a listing, not on the asset.
