Royalty Based Financing Agreement for the United States

Royalty Based Financing Agreement Template for United States

A Royalty Based Financing Agreement is a legal contract under U.S. law that establishes terms for alternative financing where the recipient company receives upfront capital in exchange for agreeing to pay a percentage of future revenues or earnings to the financing entity. This agreement defines the royalty rate, calculation methods, payment terms, reporting requirements, and duration of the arrangement. It's governed by federal and state securities laws, ensuring compliance with regulatory requirements while providing flexibility in financing structure compared to traditional debt or equity arrangements.

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What is a Royalty Based Financing Agreement?

The Royalty Based Financing Agreement serves as an alternative financing instrument, particularly suitable for companies seeking growth capital without diluting equity or taking on traditional debt. This document type has gained prominence in the United States as businesses seek flexible financing options that align investor returns with company performance. The agreement typically details the financing amount, royalty calculation methodology, payment schedules, and reporting requirements, while ensuring compliance with federal and state securities regulations. It's particularly valuable for companies with strong revenue streams but limited assets for traditional collateral.

What sections should be included in a Royalty Based Financing Agreement?

1. Parties: Identification and details of the financing entity and recipient company

2. Background: Context of the financing arrangement and business purpose

3. Definitions: Key terms including Royalty Rate, Qualifying Revenue, Payment Period

4. Financing Terms: Amount of financing, disbursement conditions, use of proceeds

5. Royalty Calculation: Formula for calculating royalty payments, including base revenue definition

6. Payment Terms: Payment frequency, method, currency, and reconciliation process

7. Reporting Requirements: Financial statements, revenue reports, and other required documentation

8. Representations and Warranties: Standard business representations and specific revenue-related warranties

9. Events of Default: Circumstances constituting default and consequences

What sections are optional to include in a Royalty Based Financing Agreement?

1. Security Interest: Provisions for collateral arrangements when financing is secured by company assets

2. Buyout Provisions: Terms for early termination or buyout of royalty obligations when parties want flexibility for early termination

3. Minimum Payments: Provisions for guaranteed minimum royalty payments when investor requires payment certainty

What schedules should be included in a Royalty Based Financing Agreement?

1. Schedule A - Royalty Calculation Examples: Detailed examples of how royalty payments are calculated

2. Schedule B - Form of Revenue Report: Template for periodic revenue reporting

3. Schedule C - Permitted Uses of Funds: Detailed list of approved uses for the financing

4. Schedule D - Security Agreement: Details of any security arrangements if applicable

Authors

Alex Denne

Head of Growth (Open Source Law) @ Genie AI | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

Jurisdiction

United States

Publisher

Genie AI

Document Type

Financing Agreement

Cost

Free to use
Clauses
Industries

Federal Securities Laws: Compliance with Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940. Determination of whether the royalty agreement constitutes a 'security' under federal law.

State Securities Laws (Blue Sky Laws): State-specific registration requirements, disclosure requirements, and exemptions that govern securities offerings within individual states.

Usury Laws: Federal and state regulations governing interest rates and consideration of whether royalty payments could be construed as interest under applicable laws.

Uniform Commercial Code (UCC): Article 9 provisions on secured transactions, filing requirements for security interests, and priority rules that may affect the agreement.

Tax Laws: Internal Revenue Code provisions on royalty payments, tax treatment of royalty income, and applicable withholding requirements.

Business Entity Laws: State-specific corporation, LLC, and partnership laws that govern business entities involved in the royalty agreement.

Contract Law: State-specific contract formation requirements, enforceability provisions, and remedies for breach of contract.

Bankruptcy Laws: Provisions governing the treatment of royalty rights in bankruptcy and creditor priorities in case of insolvency.

Consumer Protection Laws: Applicable consumer protection regulations and disclosure requirements, particularly if the agreement affects consumer rights.

Industry-Specific Regulations: Specialized regulations, licensing requirements, and intellectual property laws specific to the industry (e.g., entertainment, technology, pharmaceuticals).

Teams

Employer, Employee, Start Date, Job Title, Department, Location, Probationary Period, Notice Period, Salary, Overtime, Vacation Pay, Statutory Holidays, Benefits, Bonus, Expenses, Working Hours, Rest Breaks,  Leaves of Absence, Confidentiality, Intellectual Property, Non-Solicitation, Non-Competition, Code of Conduct, Termination,  Severance Pay, Governing Law, Entire Agreemen

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