Investments in Brazilian copyrightable assets: would profits surpass the risks?
While the pandemic has shaken the music industry, suspending live events worldwide for almost two years, music streaming revenues have soared. In this scenario, investments in music royalties have also increased. Private equity funds were attracted by the revenues from the exploitation of copyrights of musical works, particularly with regards to the public performance rights, mechanical royalties and synchronization fees.
This trend has inevitably reached Brazil – one of the biggest streaming markets in the world, according to the International Federation of the Phonographic Industry (IFPI). Funk, sertanejo, and bossa nova are some of the music genres in which it is possible to invest. The transaction is often structured by investment funds in non-standard receivables (FIDIC-NP). The revenues can be considered “future receivables of an unknown amount”, ensued from contractual relationships between artists and collective rights management societies, streaming companies or other stakeholders.
Despite being valuable, investments in intellectual property assets face legal challenges. As a general rule, the uncertainty stems from the effective amount of money each musical work can generate. However, in countries like Brazil, which follows the droit d'auteur system, other aspects must be considered in a risk assessment.
The legislation imposes a restrictive interpretation of copyrights contracts, which usually favors the content creators. Because copyright protection in Brazil does not require previous registration, it can be hard to ascertain whether the rights have been assigned to third parties. Copyright holders are also entitled to unwaivable moral rights, which permanently connect the creators to their work. There is also the neighboring rights of the artistic performers.
Furthermore, the assignee’s rights to use musical works are limited. In order to exploit the work through different technologies or by other means that did not exist when the contract was executed, the assignee requires specific prior authorization from the right holder’s. Also, there is a five-year limit to the assignment of future works. Thus, this legal scenario precludes buy-out contracts that are commonly performed in countries affiliated to the Anglo-Saxon copyright system.
In light of this, to diversify the portfolio by investing in music assets, some precautions must be taken. First, a careful due diligence of the contracts is recommended, to verify the copyright ownership and right holders’ prior commitments. Also, the solvency of the copyright assignor must also be analyzed to ensure that these revenues will not be used, in future, to settle previous debts.
The protection of this type of investment relies on the assessment of many legal aspects which are specific to the Brazilian framework. Contracts must foresee effective compensation clauses, in case of non-compliance by the copyright holder, and accountability clauses regarding the copyright holder and the vehicle through which the investment will be made.
On this issue | April 2022
New regulation on the interpretation of commercial contracts – a positive impact on the production of audiovisual works