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Where Was the Board? Some Thoughts on Potential Legal Issues in Pledge Music “Administration” Bankruptcy–Artist Rights Watch

May 13, 2019 Comments off

[This post first appeared on Artist Rights Watch]

We’ve had a lot of questions about what is going on with the Pledge Music crowdfunding platform which appears to be either on its way or already in a bankruptcy filing according to reports.  This post will be a few thoughts about the current situation which is evolving.  This is not intended as legal advice and if you’re involved in the Pledge situation you need your own lawyers and you need them right now.  Consult your local state bar association (in Texas, that would be www.texasbar.com)  Don’t ask me questions in the comments as I won’t be able to answer them, so I’m afraid this is a one-way communication.

If this is all news to you, that’s understandable because if you go to the company’s website, there’s no indication that anything is amiss, which I find to be just downright bizarre in and of itself.  Normally what one would expect is that there would be some conclusive message blazoned across the landing page, but there’s nothing.

There certainly would not be testimonial endorsements from artists who are blasting the company which arguably qualifies as false advertising even if the site as a whole does not.

Pledge Landing Page 5-11-19

This lack of communication is, unfortunately, fast becoming what I find to be the hallmark of Pledge Music’s waning days, days which have been waning for a long time now.  I’m not a bankruptcy expert but one thing I can say from experience is that companies typically do not get into bankruptcy overnight and the seeds of their destruction often go back many months if not years.  In fact, those seeds are often found in the basic business plan.  So don’t let nostalgia allow you to let anyone out of their responsibilities and don’t let anger cloud your judgement.  Easy for me to say, I know.

Which Kind of Bankruptcy

Bankruptcy in a common language sense comes in two flavors:  liquidation and reorganization.  In liquidation bankruptcy the company ceases operations, the company’s assets are sold off, the proceeds used to pay creditors (including employees in some cases), and that’s the end of it.

In reorganization, it’s literally what it sounds like.  The company intends to keep operating (often with the same management as incredible as that may sound) and it reorganizes its finances, pays off creditors as best it can, and then re-emerges on the other side with a new balance sheet and having dealt with (some might say shirked) its obligations.  iHeart is a prime example of how artists and songwriters get screwed in reorganization bankruptcy.

It would be nice if Pledge had at least made a clear statement about what its future intentions are–like you know, on its website–but I don’t think we know definitively today.  It sounds like they’re liquidating.  I saw a lot of that in the Dot Bomb era when “entrepreneurs” burned through the investors money, ran the company into the wall at 100 mph and then flipped the keys to the first bum on the street.  A bit harsh, but that’s essentially what was happening all the time in the Silicon Valley testing range.

The difference is that they did it with the investment from sophisticated investors.  It’s looking more and more like Pledge did it with the artists and fans’ money at least in part.

Creditors

Creditors also come in two flavors and this is important:  secured and unsecured.  An example of a secured creditor is a bank that lends money to the company.  It appears that Pledge had a loan from one Sword, Rowe & Co. that may be secured.  There may be others.  We don’t know, but based on open source materials, it appears to be at least one entity that could be a larger secured creditor.  If it’s this Sword Rowe & Co., they are based in New York and Nashville and specialize in music industry lending.  The Bloomberg profile on a Sword Rowe & Company appears to be the same company, and it is a successor to Sword & Company, a New Jersey based investment bank of long standing.

Secured creditors typically will be ahead of practically everyone in the bankruptcy pecking order, and sometimes can essentially wipe out any available assets.

Another attribute of a secured lender is that they typically have the benefit of loan applications and due diligence to have a good look at the financial condition of who they are lending to.  So in the “what did they know and when did they know it” race of the rats running for the door, we have to think that a sophisticated lender would know or should have known of the company’s financial condition whenever they made the loan.  Of course, investment banks sometimes have private equity arms, so it may not be the case that Sword is a secured lender.  It seems inconceivable, however, that they did not know what was going on with the company at some point.

When is a Creditor Not Creditor

The big difference–at least to me–between the kind of creditor relevant to bankruptcy and the artists whose fans pledged money is that the fan did not intend to give money to Pledge for its own use.  I think it’s fair to say that the fan paid money to Pledge to hold the money in trust, deducting solely the agreed 15% commission to Pledge, conditioned on Pledge fulfilling all of its obligations.  Given the reaction online so far, I think that the reality bears this out.  Like I said, I’m not a bankruptcy expert, but I don’t know of any rule that allows a company or its officers and directors to take money “pledged” to a third party and paid to the company in trust, spend it on themselves without authorization from anyone, and then declare bankruptcy to get out of paying it back.

There is, of course, the practical question of where the money comes from to pay the artists as originally intended, refund pledges to the fans who paid the money in the first place, and also refund all or part of any commissions taken by Pledge.  Not an easy answer, but this is why “what did they know and when did they know it” becomes an important question in my view.  If it turns out–and I can’t see how it couldn’t–that someone in a position of authority at the company like an officer or director, or perhaps even a secured creditor, knew that the money was improperly handled and spent–much less even co-mingled with the company’s own money–that person may have the responsibility to pay it back 100 cents on the dollar to either the artist or the fans.

This is one reason why you have directors and officers liability insurance.  That insurance arguably provides another pool of money (assuming Pledge had the insurance coverage).  Crimes are excluded, of course.  It’s worth asking if the coverage was in place (sometimes required by investors or lenders) and explore if one could make a claim against it in good faith.

On the other hand, bankruptcy can be a complex and confusing process that has its own set of rules, so artists and fans may wish to determine how they can perhaps argue in the alternative that they can claim creditor status if they initially take a position that they are not creditors.  That status issue likely would have to be ruled on by a court, so getting the issue in front of a judge quickly will likely be of critical importance.

This is a complex area, so if you’re involved you need to get to a lawyer quickly.

Credit Card Refunds

Fans may be able to pursue a refund through their bank or credit card company.  There are often limitations on how long a card holder can wait to make a claim for an improper charge, sometimes 90 days.  This may explain why one of the few public statements that Pledge made was to ask for 90 days to put its house in order.  By delaying any refund requests for 90 days, the company may have hoped to preclude anyone seeking a refund.

However, consumers might be able to successfully argue to their bank or credit card company that they did not know conclusively that their funds were being misused until the day that Pledge announced it was going into bankruptcy in the UK, which was last week.  One could argue that the clock to disallow the charge did not start running until that time as the company’s public statements indicated that they might ultimately fulfill their obligations to the fan (or “pledger”).

If it turns out that there was fraud involved, the credit card company may actually become your ally as they will have been duped as well.

Law Enforcement Agencies

The scope of this meltdown suggests that law enforcement agencies may at least investigate what happened.  It may turn out that there’s no criminal dimension to the situation, but I don’t think it can be ruled out at this point.

If Pledge violated state consumer protection laws, federal bank or wire transfer rules, mail fraud rules or other criminal statutes, this could be a 51 jurisdiction issue in the U.S. regardless of the choice of law provisions in a click through agreement.  I suspect that law enforcement agencies may be reviewing the situation now.

Artist Rights Groups

So far the only artist rights groups to jump in on the Pledge situation are UK Music and the UK Musicians Union.  I know the Musicians Union has been monitoring the Pledge situation for quite a while to their everlasting credit.

The silence is deafening.

Austin Panel on The Pledge Music Crowdfunding Debacle

May 8, 2019 Comments off

You may have read Iain Baker of Jesus Jones story of the band’s encounter with Pledge that we posted here and hear.  You’ve probably heard the news that PledgeMusic is bankrupt as reported in Hypebot:

UK based corporate advisory FRP will be nominated to administer a court directed sale of all assets, which would be used to pay artists, merchant bank Sword, Rowe & Company and other creditors.

Digital Music News reports giving a chronology of the events leading up to what seemed the inevitable fire sale result of “new boss” syndrome:

Now, a leaked e-mail has revealed how bad things truly are for Rogers’ company, and for artists who depended on the platform.

“Please, please, please buy PledgeMusic!  But, don’t worry.  You don’t have to pay back artists.”

Earlier this morning, Digital Music News received an interesting e-mail from an anonymous source.

FRP Advisory LLP, a UK business advisory firm, has been named the proposed administrator of PledgeMusic.com Limited and its subsidiaries (dubbed ‘The Group’).

With a pre-liquidation fire sale set to take place, FRP Assistant Manager Robbie Wirdnam has now sought “expressions of interest in the business and assets of the Group’ – i.e., PledgeMusic.

By way of introduction, I’m part of the corporate finance team at FRP and assisting my colleagues in the restructuring team, as the proposed administrators of PledgeMusic, in the marketing of the Group’s business and assets.  As you have previously looked at the opportunity on a solvent basis, I’m circling back to determine whether you have an interest in the business and assets for sale, ahead of an administration process.” [“Administration” in the UK is sort of like bankruptcy.“]

Wirdnam explains that the British crowdfunding platform faced two ‘pressures’ which ultimately lead to its demise – working capital pressures and a lack of ongoing funding.

This is serious stuff.  There’s potentially millions at stake and thousands of people worldwide who will be harmed, not only the artists but also fans and vendors, producers and songwriters.

UPDATE: As Jem Aswad in Variety notes in “PledgeMusic Nearing Bankruptcy, Although Sale Talks Continue“:

It should be noted that a buyer of PledgeMusic would be taking on the debts owed creditors, which include artists who launched programs with the company and owed money, which is estimated to be as much as $3 million total (here’s a small list of how much certain artists were owed, as of February). As the company has demonstrated in the past, tends to go to the most prominent, or at least the loudest, artists affected.

Hypebot also has a story on the FRP situation “Pledge enters pre-administration as buyer deliberates”:

UK based corporate advisory FRP has been named to contact potential buyers and value the company’s assets in pre-administration; while in parallel, the interested buyer finishes due diligence.

If no buyer steps forward within the week, PledgeMusic will likely enter Administration with FRP as the proposed administrator.

If you’re in Austin, Chris Castle is moderating a panel about Pledge with Jesse Moore and Peter Ruggero, two bankruptcy law experts.  The panel is co-hosted by the Austin Bar Association Entertainment & Sports Law and Bankruptcy sections  and titled “The Pledge Music Crowdfunding Debacle” on May 22.  Here’s the event description:

The panel will review the reported facts on the decline of PledgeMusic.com, a crowdfunding platform directed at independent artists, established artists with significant fan bases and labels.  PledgeMusic has taken in contributions from fans but has not paid out all or a significant portion of those funds to the artists for over a year. Many Texas consumers, artists and vendors have been affected by the company’s collapse.

The panelists will analyze the effects of this collapse on artists, the rights of consumers and vendors and the potential future outcomes if the company does not solve its financial crisis and seeks protection of the insolvency and bankruptcy laws.

As far as we know, this is the only response from the legal community so far.  Chris tells us that it is directed at artists, fans and vendors as well as lawyers.  $5 covers pizza and parking.

Deets are:

Wednesday, May 22, 2019
12:00 PM – 1:00 PM CDT

Austin Bar Association
816 Congress Avenue, Room # 700
Austin, TX 78701

 

 

Guest Post by Iain Baker of @jesusjonesband: An update on the PledgeMusic Debacle

March 15, 2019 Comments off

[We’re pleased to provide a platform for Iain Baker of Jesus Jones to update MTP readers on the slow motion train wreck called Pledge Music.  This has turned into a real financial crisis for artists and their vendors as well as the fans.]

We are still no nearer a resolution, it would seem. And it feels like they’re running down the clock. Artists are told to dial back any criticism of Pledge, in order to make it easier to sell the company. The inference here is that it’s our fault if this process doesn’t progress smoothly.

Well, the longer this all goes on, and the more urgent it becomes for artists to pay bills and replace money that PLEDGE took from them, the more I just feel like saying: Well, was it my fault that the company seems to have been basically insolvent in 2016? Was it my fault the company never told anyone about that?  Was it artists that oversaw a culture of financial mismanagement? Did artists offer huge wages for people to come in and try and turn Pledge into an “industry leader”?

I can’t help feeling we’re being kept in the dark, and fed horseshit. And we’re not the ones who caused any of the problems–the only thing we’re responsible for is helping the company thrive. Pledge has a beautiful set of offices in a prime central London location, and it feels like they’re sitting around a conference table, trying to save their careers, while the artists are stood outside in the rain with our noses pressed up against the windows, hoping they’ll help us out [with the artists’ own money].

None of these problems were caused by us, yet we’re the ones being made to wait, made to pay, made to struggle. If nothing else, this situation is profoundly unfair.

Pledge’s continued lack of transparency makes it even harder for the artistic community. We’re more than stakeholders in this – the company thrived on the backs of all the hard work that artists put in

And of course, it’s a slap in the face for all of the fans that engaged with the artists and provided the cold hard cash to make this thing fly.

Business is an equation – a system that should be in a state of balance. Pledge allowed this to spin out of control, and they forgot about the people that made it all work. That’s you, and it’s me.

Now, as they try to make it all work – shouldn’t they be trying to balance the equation? To ensure everyone feels like a valued part of the business? Well, hands up anyone who thinks that’s the case, right now.

 

 

 

 

 

 

 

 

 

 

 

 

Guest Post by Iain Baker of @jesusjonesband on the PledgeMusic Situation

February 18, 2019 Comments off

[Used by permission of the artist.  This post is from a series of tweets by Iain Baker of Jesus Jones regarding both their experience being cut off by PledgeMusic and also the implications for the larger music business.]

The music business is fond of winning battles, and losing wars. The best example I can think of is squashing Napster – that victory was anything but – it didn’t hold back the tide of downloads, it merely hastened the rise of streaming.

Above all, it entrenched a generational shift in attitude towards the ownership and transference of digital content. So when the Pledge disaster began to unfold, my first thought was the battle in front of me. How could I get back the thousands of pounds I was owed?

How could Pledge survive, so that I could release more music, in the future, and replicate the successful campaigns we’d created thus far? But, as time passed, my emphasis shifted to the bigger picture, and the war, not the battle.

This was driven by one realisation: what if it happened again? If the site is saved, what’s to stop Pledge just doing it again? What’s to stop them getting another load of money in, and just losing it again? What could stop that? And the answer, sadly – not that much.

I wanted Pledge to be saved – but the chances aren’t high. They’ve apparently got unsustainable debts, huge liabilities, and a board of directors who are – at best – incompetent, and at worst – could possibly be open to allegations of dishonestly and fraudulent mismanagement of funds.

Companies like Pledge are held hostage by VC cash from investors. These investors don’t seem to care whether a struggling songwriter gets a chance to put out a great new record – they just want their investment back, with a profit on top. And I get that – that’s how business works.

But VC cash is flung around in the hope of finding the next big thing – and that need for success comes with a greater need to gamble, and a corresponding disregard for consequences. People poured a lot of money into Pledge, so that Pledge could go out and get more money.

The artistic endeavours that were at the core of Pledge became secondary to the pure profit that could be leveraged. I’m think this hope that investors would see returns is what was driving Pledge’s doomed efforts to grow, exponentially.

I can’t help but think that investing in something like a charity would have been regulated more tightly, ensuring that funds raised were managed effectively, that plans would be in place to ensure realistic growth, whilst still allowing benefactors to be rewarded.

This wouldn’t be an issue, if Pledge were selling biscuits, for example. Trying to sell a great new biscuit, and become the biggest and best biscuit retailer in the world…….

But Pledge was operating in the same way as a Bank, or a building society [or credit union]. They were the custodians of people’s hopes and dreams. In the same way that a bank would take the shoebox of money from under your bed, and say “don’t worry, when you need this, we’ll be there for you.”

But Pledge weren’t there, for anyone. People trusted Pledge, and Pledge didn’t show any of that trust, in return.

The Banking system is held together by trust, and by confidence. But since the financial crisis, it’s been vitally important to underpin that confidence with safeguards, and structures which ensure that banks are protected from contagion and shock to ensure that poor choices cannot threaten people’s trust and security. And this is what needs to happen if we’re going to save Pledge. We need to think about saving the idea of it, and not necessarily the site itself.

For marginalised, struggling artists – or for those who just need to have hope, when traditional lines of business seem closed – a site that offers a way to promote themselves effectively is a godsend.

But the trust which should have kept this system afloat was torpedoed by the very people who were charged with protecting it. We simply can’t let that happen again. We need the business model, but we don’t need the people who ran that business into the ground.

We need a new structure where top-down investment is replaced by community, trust and transparency, growing from the ground, upwards. We need financial safeguards, and guidelines to make sure everyone in the supply chain is protected.

The old model was quick, and easy – some of that simplicity may be lost. Consumer law, and contractual obligations may hamper initial progress, and make the path longer to travel.

But if we’re to try and maintain the vital business model we’ve all come to rely on, then we owe it to ourselves to try and make it work.

When it comes to actually defining this new plan – well, I don’t have the answers. I wish I did. All I know is that if we stick together, and share our communal knowledge, passion, and commitment, we’ll get there.

So – I don’t really know what’s next. If anyone can suggest a way forward, or a way to start putting this into action, I’d love to talk further. You know where I am.

The MTP Podcast: When is a Pledge Not a Pledge? The PledgeMusic crisis

January 25, 2019 Comments off

 

Chris Castle discusses the current crisis with PledgeMusic payments.

SHOW NOTES

PledgeMusic: Once a Crowdfunding Haven For Artists, Now Owes them Thousands of Dollars–Billboard www.billboard.com/articles/busines…ds-late-payments

Digital Aggregator Deals: Is the New Boss Worse Then the Old Boss?

musictechpolicy.com/2012/02/01/read…n-the-old-boss/

What is the Difference Between Dischargeable and Nondischargeable Debts in Bankruptcy? 

www.nolo.com/legal-encyclopedia…ts-bankruptcy.html

Which Debts are Discharged in Chapter 7 Bankruptcy?

www.nolo.com/legal-encyclopedia…-7-bankruptcy.html

Chapter 11 Bankruptcy for Small Business

www.thebankruptcysite.org/resources/ba…sinesses.htm

Secured vs. Unsecured Debt in Chapter 7 Bankruptcy

www.thebankruptcysite.org/resources/ba…7-bankruptcy

Bankruptcy in the UK

www.gov.uk/bankruptcy

Civil Investigative Demands

www.law.cornell.edu/uscode/text/31/3733

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