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How mp3.com's IPO Changed SEC Regulations

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By Eliot Van Buskirk of Evolver.fm.

One of the big stories of 2012 was that the big music services, most of which are losing money themselves, are stiffing artists. Hopefully, 2013 will be the year when payouts from subscription services make the big leap we've heard they will, and maybe even when physical distributors will stop bullying labels into giving them part of their download revenue.

But before iTunes became the top music store in the world, and even before most people knew what an MP3 player was, one music start-up offered a different vision for compensating artists, albeit on a one-time-only basis. When it had its initial public offering, MP3.com (the Michael Robertson-cofounded one, not the Vivendi-owned one, or even the CNET property of which I was the editor) cut artists with music on the site into its IPO as part of its “friends and family" offering.

This was MP3.com's way of paying back artists who had uploaded their MP3s to the site for free. I was one of them, thanks to some of these songs.

So when I ran into MP3.com cofounder Michael Robertson at a Spotify event last month, I mentioned how neat that artist-friendly IPO was, even though I missed out on it myself, having thrown that letter from Charles Schwab directly into the circular file. Had I opened it and joined the IPO whose invitation it contained, I would have earned a 126-percent return in a single day [update: It actually could have been much more — see update below]. That would have been nice, but whatever.

Robertson told me about an interesting bit of digital music history involving one implication of that IPO, which I might as well document, in the news lull that typically follows the holiday break and precedes next week's Consumer Electronics Show.

Because the “friends and family" provision of the SEC's IPO rules only apply to U.S. citizens, MP3.com's IPO was only open to U.S. artists who had uploaded music to MP3.com. Approximately 18,000 people qualified, by Robertson's recollection, which is far more than the usual number of “friends and family" IPO participants. Still, he sought the same treatment for these artists (many of them amateurs) that the banks did for their biggest investors, despite encountering considerable friction.

“I finally understood that expression 'No good deed goes unpunished,'" recalled Robertson. The system was never designed to include that many people in an IPO, and he said he faced all kinds of resistance from the banks. However, MP3.com managed to do it anyway.

“Schwab's phonebanks were flooded," he said, and many artists were frustrated because they couldn't get through to buy or sell their shares.

As a direct result of that IPO, Robertson said, the United States Security and Exchange Commission altered its rules limiting the number of friends and family participants in any IPO.

This is not earth-shattering news, but it's an interesting footnote to digital music history: An attempt to make the internet pay musicians apparently caused the Security and Exchange Commission to alter its rules for how many people can join an initial public offering. Weird.

Update: Robertson sent over the following additional details:

“Each artist could purchase up to 500 shares.

“IPO shares could be sold at anytime (unlike early investor shares or founder shares which had lockups).

“Shares during the first day went up over 400 percent then settled at 126 percent. For those with good timing they could have made a nice return on the investment and I still hear from artists who built a studio or put a kid through college with the proceeds.

“International artists felt ripped off, but this was an SEC rule.

“MP3.com was Schwab's first foray into IPOs, and their phonebanks crashed causing some people to not be able to setup accounts, place orders or sell shares when they wanted which made for some unhappy investors.

“This opportunity normally is only available to top-tier bankers which is why there was such resistance from the SEC. They ironically think that having a large number of directed share participants (aka friends and family) able to purchase relatively small amount of shares each (500) is against the rules because it's not 'to the public.' But if you have a small number of participants designated to buy large amount of shares (which is how 99 percent of IPOs work), then that's OK and qualifies as shares to the public.

“With a portion of the IPO proceeds, I set up 'Payback for Playback,' which was a pool of money ($1 million/month) which was paid out to artists based on listens. Others like Spotify and Pandora essentially do something like this now, but the big difference was with MP3.com there was daily accounting in the stats for each artist which they could view. It's worth noting that this made MP3.com a target for phony artists with bot generated user plays so we had to invest more heavily in our analytics department. There was recently some rumbling about similar issues with Youtube plays."


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