Music Fundraising, Orange Groves, and Securities Laws

In March 2025, Blackstone announced the consolidation of its music catalog holdings and its Hipgnosis Song Fund (Hipgnosis) to form music brand Recognition. Hipgnosis, which Blackstone acquired in 2024, was the largest IPO in the UK in 2018 when it offered retail investors the opportunity to invest in a collection of music song catalogs purchased directly from artists.

 By treating hit songs as assets capable of generating long-term, predictable income not correlated to the stock market, Hipgnosis sought to provide retail investors with a hedge against market fluctuations. And because Hipgnosis held catalogs from numerous artists across multiple genres, it would offer a diversified, if still high-risk, investment.

 Unfortunately, after the successful IPO, Hipgnosis' fund management was found to be lacking. By March 2024, Hipgnosis' portfolios were revalued at 26.3% less than they had been six months before.

 A 2024 due diligence report criticized fund manager Hipgnosis Song Management (HSM) for failing to follow music publishing industry standards. According to the report, HSM had used strategies that overstated both revenue and EBITDA, and that there were multiple, inconsistent versions of the same financial information, which sometimes varied from Hipgnosis’ public disclosures. As a result, HSM received excess investment advisory fees.

 Hipgnosis’ rapid rise and fall illustrate that forming an investment fund, whether it be comprised of song catalogs, real estate, or crypto assets, is not for the faint of heart. Plus, in the US, a fund like Hipgnosis is a security, so the fund manager also must comply with securities laws and Securities and Exchange Commission (SEC) regulations.

 This article first explains what orange groves and music fundraising have in common and why funds like Hipgnosis are securities. Then, the article discusses foundational legal and practical considerations a sponsor should consider when launching a fund to investors, and how musicians can inadvertently find themselves on the wrong side of securities laws.  

 Why Investment Funds are Securities

Investment funds, whether they hold song catalogs, real estate, a fine art collection, or any other collection of assets, are considered investment contracts under the Securities Act of 1933 (Securities Act).

The Securities Act doesn’t define “investment contract.” However, in 1946, in SEC v. W.J. Howey Co., the US Supreme Court crafted a definition of "investment contract," which has remained largely unchanged to this day. Howey involved the sale of the orange groves with an optional management agreement, something that doesn't seem much like a security, such as a stock or bond. However, the Supreme Court held that the sale of orange groves was an “investment contract.” 

In Howey, the Court held that a business transaction is an investment contract if:

1.       There is an investment of money (or other assets).

2.       The investment is in a common enterprise (generally, this means a pooling of assets).

3.       There is an expectation of a profit.

4.       The profit comes from the efforts of a promoter or a third party.

Since Howey, a number of unlikely investments, including whiskey warehouse receipts, pay phones, and ATMs with placement contracts, interests in a lumber mill, commercial real estate, and, of course, music royalty funds like Hipgnosis, have been determined to be investment contracts.

How a Band Can Become Subject to Securities Laws

Suppose four friends decide to form a band. All four friends play in the band, and they divide the non-musical aspects of band management based on each member's skill set. Two members agree to be songwriters. A third member agrees to handle marketing and booking, and the last band member says they’ll handle the financial issues.

They budget $20,000 to buy equipment, set up a website, and purchase marketing materials and merchandise to sell. Each band member contributes $5,000.

This band's plan satisfies three of the four elements of an investment contract. The friends are 1) investing money, 2) into a common enterprise, and 3) with the expectation of a profit. But since each friend contributes significantly to the enterprise's success, the profit comes from their own efforts – not the efforts of others. This arrangement isn't an investment contract.

Let's change the facts. Suppose two years after the band is formed, all is going well with the division of responsibilities. The band, which is gaining in popularity, decides to make and distribute a recording and go on tour. The band turns to friends, family, and fans to raise the $100,000 they need for these projects, promising those individuals a share of the recording and tour revenues in exchange for their investments. These individuals are passive investors who depend on the band’s efforts for a profit. Their investments are an investment contract and are subject to securities laws.

Suppose instead of offering investors a share of the band’s revenues, let’s say the band asks to borrow money from friends and family to finance their recording and tour. The band says it will give investors promissory notes and pay 5% interest. 

Compliance Requirements for Investment Contracts

So, what does it mean when an investment is subject to securities laws?

Registration or Exemption

Federal securities laws require that all securities offerings be registered with the SEC or exempt from registration. It's costly and time-consuming to file a registration statement with the SEC, so smaller investments usually are offered under an exemption from registration.

But the SEC isn't the only securities regulator. Each state has its own securities laws and regulators. And securities offerings also must either be qualified or exempt under state securities laws. That means the offering must comply with two sets of securities laws.

Two of the most popular federal exemptions are under Rule 506(b) and 506(c). The requirements to qualify for those exemptions are beyond the scope of this article, but they include restrictions on who can buy the securities. For example, Rule 506(c) requires that individuals have an annual income of $200,000 ($300,000 with a spouse or domestic partner) or a net worth of $1 Million, excluding their home equity, in order to invest.

Rule 506 exemptions are popular because they preempt substantive state securities regulation, so there's only one set of securities laws to comply with. Most states require the issuer to file a notice after the sale of a Rule 506 offering in their state, which is much less burdensome than qualifying securities in each state.

Regulation CF, which allows equity crowdfunding via established online platforms, is another exemption that preempts substantive state securities regulation. Anyone can invest in a Regulation CF offering, but the amount they can invest may be limited depending on their income and net worth.

As the new kid on the block, many startups are initially attracted to Reg CF, but it’s not without drawbacks. Platforms that sell Reg CF securities can charge hefty fees. And someone who raises money under Reg CF must provide ongoing annual reporting to the SEC for a period of time, which can cost money for an accountant and attorney. 

Also, because the dollar amounts individuals invest often are small, the issuer may need to attract hundreds of investors to raise the amount of money they need. The administrative burden of tracking that many investors and their investments can be significant and time-consuming for many startups. But for our hypothetical band, it might not be such a bad thing to have hundreds of fans who have a financial investment in the band’s success.

No Transaction-Based Compensation

Securities laws also restrict who can sell securities. Generally, only licensed broker-dealers can be paid (or given something of value) for selling securities. So, if an investment is an investment contract, the issuer can’t pay an unlicensed individual a success fee for bringing investors into the deal. This is called “transaction-based compensation” in the securities field.

Compensation includes giving anything of value. So, giving someone free shares of stock or another non-cash item of value for successfully finding investors for an offering isn’t allowed unless the recipient is a licensed securities professional.

For example, suppose the band announces that it will give a free, limited-edition LP of its newest extended play to any fan who connects the band with an individual who invests at least $500 in the band’s project. The LP is an item of value, and the fan will only receive it if the individual they introduce to the band invests. Under this example, the fan is receiving transaction-based compensation and needs a securities license.

Fundraising Without Investment Contracts

All four criteria of the Howey test must be present for fundraising to constitute an investment contract. So, the band’s fundraising won’t be an investment contract if one of those criteria is present.

The first, second, and fourth criteria (investment of money and common enterprise) will nearly always be present. Unless the band has a very generous benefactor, any fundraising will involve pooling funds from multiple individuals. And as discussed earlier, unless the band is self-funding its efforts, any expectations will be based on the efforts of others.

So, to avoid investment contract classification, the band must engage in fundraising that doesn't involve the expectation of a profit. That type of fundraising, seen on platforms like GoFundMe and IndieGoGo, is often called "donor-backed crowdfunding."

While donor-based crowdfunding may look like a good idea, it has drawbacks. One obvious drawback is that it depends on the generosity of others. Anyone other than a superfan might not be willing to donate significant money with no possibility of a profit. Also, since donor-backed crowdfunding doesn't require ongoing reporting or the expectation of a future product, it won't provide the band with a non-financial benefit of fundraising—an ongoing reason to build relationships with fans.

As a reminder, just because something isn’t an investment contract doesn’t mean it’s not a security. Stocks, bonds, notes, and other more “conventional” investments are also securities. So, the band can’t get around securities laws by seeking loans from fans and giving them promissory notes in exchange.

Conclusion

Like starting any new business endeavor, building a band’s “business” is harder than it looks. In addition to the hours involved in songwriting, rehearsal, and finding performance opportunities, building a band’s “business” costs money.

However, the securities laws can be a literal minefield for the uninitiated. As an attorney, I’m biased. But I’m also a musician, so I understand that it may seem like an unnecessary expense to bring an attorney onto the band’s team.

However, having an attorney on the team to handle legal issues is just as important as having a sound engineer to handle mixing for a performance. Both let the band members do what they do best: creating and performing music.

© 2025 by Elizabeth A. Whitman

Any references to clients and their legal situations have been modified to protect client confidentiality.

DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice to any person. No one should take any action regarding the information in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless a written contract is signed by all parties.