Frequently Asked Questions Regarding REX Scaled RoyaltiesBack

Q:  What is the benefit of the Scaled Royalty approach for the owner of a business?


A Scaled Royalty is a process through which the business owner is able to use the projected revenues as a means of reducing the overall amount to be paid to royalty investors. This occurs, as there is a reduction in the amount to be paid in future royalties, after there has been a surplus of an agreed percentage, during an agreed period, known as the Selected Adjustment Period (SAP). Therefore, if the business owner is conservative in projecting revenues there could well be a significant surplus in the royalties paid over that which was anticipated by the investor and resulting in either a lower percentage of revenues in the future or for royalties to be due for a shorter period. Of course there is also a penalty in the form of the difference in amount between the cumulative royalty payments anticipated to be received in the SAP and those received by the investors. If the shortfall exceeds an agreed amount there is a Make-Up note to be paid or possibly an extension in the royalty payment period.

Q:  What is the Scaled Royalty benefit for the royalty investor?


The approach gives the business owner a significant motivation to be very conservative in the projection of revenues for two reasons. First, if the revenues are greater by an agreed percentage in a SAP the amount of royalty payments afterwards is reduced through a rate reduction or a shortening of the royalty payment period. However, if there is a deficiency in the level of revenues and therefore royalties during a SAP the length of the royalty payment period will be increased, thereby making the royalty more valuable.However, if there is a deficiency on the level of revenues and therefore cumulative royalties during a SAP there will be either a Make-Up note for the difference between the anticipated and received royalties or a lengthening of the royalty payment period.

Q:  Can the length of the Selected Adjustment Period (SAP) and/or the levels of surplus or deficiency be changed once established?


All contracts can be modified or cancelled by the agreement of the contracting parties. However, where there are multiple investors holding royalties it would be much more difficult to make changes. It must also be noted that in many cases the royalty issuer will have a redemption right and may, as a result of the previously agreed changes adversely affecting the issuer, decide to redeem the outstanding royalties.

Q:  How are the terms of the Scaling determined or negotiated?


The terms are negotiated by either the investor(s) and the royalty issuing company directly or by an underwriter or investment banker representing the investors. The website is intended to assist in the negotiation of the terms as the impact of future events can be seen and assessed.

Q:  What if the royalty issuer refuses to adhere to the terms of the contract in the event of a deficiency in levels of revenues?


In the approach we recommend there are critical assets of the royalty issuing company held by a trustee-like party who would have the ability to cancel the right to use these critical assets in the event of a breach of the contact by the issuer. It is believed to be unlikely the issuer would choose to be unable to conduct business by breaching the contract with royalty investors.

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