Producer, impact investor, founder of Untold.io.
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These days, real estate tokenization is a hot topic. As a primary alternative asset class, more real estate-pegged securities are being tokenized. I expect arts and entertainment to be next.
According to a 2022 Boston Consulting Group forecast, tokenization of real-life alternative assets could be worth $16 trillion in 2030. Illiquidity is the biggest issue when it comes to these historically out-of-reach asset classes. One major reason for the global illiquidity problem for alternative assets is the lack of scalable technology to liquidate.
So what does this mean for the arts and entertainment community? Given the streaming boom and the massive content acquisition budgets declared by major studios, one can argue that content is a prime asset class that has been historically in the hands of well-networked and wealthy individuals. Similarly, fine art has been limited to wealthy investors.
Let’s take a look at the positioning of this asset class in the world of tokenization. Currently, real-life assets are traded on exchanges or other markets. The transactions take place through regulated third parties.
Before I go any further, it is important to understand what a “security” is. The Corporate Finance Institute defines a security as “a financial instrument, typically any financial asset that can be traded” noting that what qualifies as one “generally depends on the jurisdiction in which the assets are being traded.” Currently, regulators in the U.S. are busy with exactly this: defining the meaning of digital assets.
What happens when you digitize a security? Let’s take a look at a hypothetical example.
Jesse runs an art gallery based in Chelsea, Manhattan. Her gallery has frequent guests, and it’s always busy, especially on weekends. Tourists tend to stop by often; however, the conversion rate is pretty low in this art gallery, given the prices. Not everyone who passes by can drop $15,000 on a piece of art and bring it home, regardless of how much they loved it.
By partnering with a fractionalized ownership portal, Jesse is able to offer her patrons a more affordable way to invest fractionally, rather than purchasing the whole piece.
Tokenization could be used in other ways to democratize investment opportunities in the entertainment industry.
Imagine a non-accredited investor, Justin, who wants to invest in his favorite director who is shooting a new feature film starring his favorite actor. He could participate in a Reg CF offering along with other fractional owners. By participating in an SEC-compliant offering, he could streamline his due diligence process and support the artist while holding profit participation rights in the movie. If the movies got really famous and Justin held the security for at least 12 months, he could choose to liquidate before a sales event, maybe in the secondary markets. His fractional ownership certificate would securely sit in his wallet, waiting to be either liquidated or traded. If he waited for the movie to be sold to a distributor or a streamer, he could collect profits in his wallet depending on payment schedules.
Now let’s imagine an issuer: an independent producer, Jillian. She runs a production company based in Los Angeles. Her track record is successful, and she was able to put many popular titles under her belt. Her business is doing well, but she is having a hard time scaling the volume given funding restrictions. The independent financiers in Hollywood are not giving her the results she needs. Even though her business model makes sense for an angel investor or a venture capitalist, she isn’t able to get their attention in a way her business plan deserves.
Let’s imagine a scenario where Jillian partnered with a fractionalized ownership portal. She placed a Reg CF offering on a licensed funding portal to let people invest in her production in fractions, and 150 people who saw it contributed $8,000 on average. This group of investors now collectively owns the movie’s intellectual property. Jillian would complete the production and distribute the profits prorated once a liquidation event occurred using the wallet integration on the funding portal. An example liquidation event could occur at a film festival, such as Cannes, or Jillian might use her existing deals with streaming platforms to create a viable exit.
These are just a couple examples of how tokenization could work in the world of arts and entertainment.
The idea of minting a security on the blockchain is useful when you consider the operational frictions attached to buying and trading securities. Registered agencies may publish available securities online, and investors may purchase these assets using an integrated wallet. The wallet would carry all payment information along with the portfolio itself to hold the securities purchased. According to the rules of Reg CF, one must hold a newly purchased security for 12 months before being able to trade it in the secondary markets.
How about payouts? Blockchain technology comes in handy during cap table management and distribution of profits, as well. Liquidation events are more transparent and investor-friendly. One may be able to transfer assets from one wallet to another, and the process would be accompanied by know-your-customer and escrow agencies. Secondary markets could also become more active and user-friendly.
As tokenized securities are still emerging, their future and practicability are still unclear. But while there aren’t yet many real-life use cases of tokenized securities, the possibilities are exciting.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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