Filings in Focus: Intangible Assets, Tangible Income?

The Directions.com IPO is a big deal, with huge, potentially paradigm-shifting implications for fractional investors.

At first glance, you might think it’s more of the same. Another asset class. Just another collectible to the more cynical out there.

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But whatever your thoughts on the offering itself, it signifies the beginning of something much larger. Yes, Rally has announced its entry into intangible assets in earnest, which, at face value, means little. Beneath the surface, though, it’s a harbinger of something that fractional investors have not - to date - received.

Income.

Until today, investors on the major platforms have been resigned to the success or failure of an investment resulting from one question and one question alone: did the value go up? Of course, a focus on capital appreciation is not uncommon to many investments, but the yield-generating end of the spectrum has largely gone ignored. The possibility of revenue-generation has been mentioned in connection with the hard, collectible assets (more on that later), but not to a degree where it would impact a prospective investor’s thesis in either direction.

With the arrival of intangible assets, that possibility of revenue-generation becomes an expectation. That these aren’t your traditional fractional assets is signaled by the fact that Directions.com appears on an SEC filing for an entirely distinct Rally entity: RSE Innovation, Inc. For reference, cars have been filed under RSE Collection, Inc., while collectible assets are filed under RSE Archive, Inc. 

Okay, these aren’t particularly important or particularly interesting details in isolation. I yawned while typing them. BUT, the offering circular for RSE Innovation is quite different from filings we’ve seen in the past. 

Right off the bat, a term is defined in the RSE Innovation filing that is not defined in the others: contractual revenues. 

“Revenues derived through the usage of the Underlying Asset are referred to herein as the ‘Contractual Revenues.’”

Hello! That’s a departure from the RSE Archive filing, where the door to revenue is more firmly closed: “No revenue models have been developed at the Company or Series level, and we do not expect either the Company or any of its Series to generate any revenues for some time.”

While that language appears in RSE Innovation as well, it’s used in relation to Membership Experience Programs, and it’s surrounded by discussion of how intangible assets might produce revenue. Membership Experience Program revenue is the type that has been referred to in previous filings and relates to museum type experiences, sponsorship revenue (from including assets in media), merchandise, etc. Not necessarily the type of revenue that one might expect to trickle to the shareholder’s bottom line in short order.

With intangible assets, we’ve officially crossed a border into new waters. Our concern will no longer be with capital appreciation alone, but with the sustainability, and even growth potential, of revenues relating to an asset. But what kind of assets are we talking about here?

Well, for one, we of course know that domain names are part of the plan. In fact, that the Directions.com offering has been given the ID #URL2 tells us that there’s more to come (what’s #URL1?! Are we revitalizing AskJeeves?!). We covered Directions.com on the Pro edition of Bull Case Bear Case this week, and the introduction of revenue-generating potential was discussed.

With domain names, there exists the possibility of revenue derived from “parking”. When a domain name owner does not have plans to put that domain to use for operational purposes, they can instead - typically through the use of a domain parking service - use it to generate advertising revenue. Essentially, visiting the domain will bring you to a landing page featuring links & advertisements for subject matter often relating to the word(s) in the domain name. The domain name owner is then typically compensated for clicks of those advertisements (on a CPC basis). 

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For now, it’s unclear whether or not Rally will indeed pursue parking revenue (again, worth checking out Bull Case Bear Case for details on how revenue has evolved), but the offering circular does note that the exploration of such a practice is in the cards: “The Company will determine if it is appropriate to make the Underlying Asset available for “domain parking” advertising and, if so, contract with a third party for such services.” But there may be more attractive options available, leasing the domain among them. And if filings aren't your thing, Rob Petrozzo of Rally noted on our Grails podcast in relation to Directions that "the potential revenue stream that comes from leasing domain names to a third party and a lot of stuff that happens with other domains is certainly open as a possibility for dividends and ongoing revenue streams for investors in this particular asset."

While revenue generation may ultimately be less consequential for certain domain name assets, which some might view as more akin to other collectibles on the platform, there will unquestionably be assets where revenue is paramount. 

Like what?

Musical and media royalties. Contractual rights and revenues. Non-fungible tokens. Historical aircraft leasing.

Didn’t see that last one coming, did you? Nope. Neither did I. But it’s straight from the filing as a "potential future asset class". And before long, it could be straight from the filing and into twitter bios everywhere.

“Historical aircraft lessor”. Chef’s kiss. 

We’ll set that aside for the moment and cross that bridge when we get to it, whenever that may be. The inclusion of NFTs is additionally interesting - might this intangible asset endeavor lead to a more precise implementation of policies around airdrops and other community perks? We know a few BAYC holders who might be interested..

In the case of the former two categories though - royalties and contractual rights & revenues - revenue is, literally in the latter case, the name of the game. Collectibles, these are clearly not. 

Royalties are not a new investment class, nor are they new to fractional. Marketplaces like RoyaltyExchange have served as the arena of trade for royalties - predominantly music but also other media and trademarks - but as with other assets, high entry values present opportunity for democratization, whether through fund investment or fractionalization. SongVest has begun this effort for Reg-A investors, focusing on the music space as the name suggests, while Royal.io is offering an NFT-centric play. But with hundreds of thousands of existing users, Rally would be introducing this asset class to an entirely new audience, and potentially bringing it more mainstream in the process.
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The underlying questions requiring answers to form an investment thesis for these are not entirely dissimilar to those for familiar assets. As is often the case, the critical undercurrent that will drive value is cultural relevance: the prospects for increasing or, importantly in this case, maintaining it over the investor’s time horizon. 

In the royalty world, we’re not just worried about whether or not there will be growing demand for the asset subject for the purposes of resale value. Here, the revenue generated - and outperformance - depends on that popularity. That’s a risk factor discussed at length. Estimating the strength and, perhaps more importantly, the longevity of popularity is a tall order. But this is what fractional investors will need to begin to wrap their arms around in order to form an investment thesis. 

To the extent domain parking is relevant to a domain name’s investment prospects, the same would apply. Is the term growing in popularity or fading? At what rate? What could change that trajectory?

It requires a moderately different toolset, but not altogether foreign. 

The implications, though, are potentially broad. The inclusion of yield-generating assets has the potential to attract a category of traditional investor (I’m not trendy enough to unironically use “TradFi”) that has not yet been swayed by the collectible world, whereas vehicles like fractional real estate investments more easily resonate. It’s particularly relevant that both the yield and performance at hand with these intangible assets would largely be uncorrelated to traditional investments. Music-listening, for example, is effectively recession proof. 

Good times, bad times, we’re still in love with the “Shape of You.” Yup, that was a weird thing to say, but did you know that’s the most streamed song of all time on Spotify? Since 2017. Over 3 billion streams. Eddie Sheeran, you sly dog!

Odd Sheeran detour aside, the investment merits of some of these assets are likely to be more immediately clear to the skeptic, especially in a world that’s been starved for yield for years. An investor that’s been convinced to onboard by those merits will then more easily have their head turned by collectible asset classes than someone outside of the ecosystem, adding further demand and liquidity to those areas. As Petrozzo discussed on our Grails podcast, when someone comes to the platform via an NFT offering, their second purchase isn't necessarily another NFT; they're getting diversification and exploring other assets.

It’s probably time to mention one pesky detail that’s potentially very relevant to the discussion at hand. There has been a dormant element of the filings across marketplaces that has not come into play to date: management fees. 

In the case of RSE Archive for example, “the Asset Manager is paid a semi-annual fee of up to 50% of any Free Cash Flow generated by a particular Series.” Because there hasn’t been free cash flow generated by assets to date, this fee has not come into play (it does not appear from the filings that asset sales are applicable). In these cases, there would be additional legwork done by the marketplace to generate revenue (and ultimately FCF). However, if 50% of FCF is indeed levied as a fee, that of course changes the outlook for yield. The “up to” language strikes me as important. Something to watch for. 

Still, the inclusion of a more familiar (albeit unique) asset investment profile has the potential - if done right - to bolster growth of the entire alts landscape. People like passive income. It’s tangible evidence that their money is working for them. That almost always resonates, even to the collectible skeptic. 

Perhaps this will end up being much ado about little, but if all signs point to tangible income from intangible assets…outsiders can ignore them at their own risk. 

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