@davidclowery: Pledge Music Fiasco is Weirder than You Think: Part I

[Editor Charlie sez:  What do the Panama Papers and Pledge Music have in common?  More than you might think….]

It seems to be a distraction, unintentional, but still a distraction from the fact Pledge Music’s  purportedmajority shareholder Joshua Sason, is the guy named first in the SEC complaint below.

(The other defendants Sharma and Salviola have an interesting history See here, here,  hereand  here. Also named is the fabulously named Zirk de Maison. He is also an interesting person: see here.)

Now this complaint doesn’t directly have anything to do with Pledge Music, but it is certainly part of the story.  The majority shareholder of a company running out of money gets an SEC complaint for what appears to be a fraud perpetrated by his other company? C’mon!  Anyone associated with Pledge pretending like it’s not part of the story? Well, that makes it part of the story.

If you read the complaint it alleges pretty crazy stuff. From the SEC press release that goes with the complaint:

“According to the SEC’s complaint, from approximately December 2012 to June 2013, microcap stock financier Magna Group, which was founded and owned by Joshua Sason, engaged in a scheme to acquire fake convertible promissory notes supposedly issued by penny stock issuer Lustros Inc. and then to convert those notes into shares of Lustros common stock. The defendants then sold the shares to unsuspecting retail investors, who did not know that the shares were fraudulently acquired and were being sold illegally. The defendants’ sales of the Lustros shares also had the effect of destroying the value of the Lustros shares held by the public.”

So this guy didn’t get charged because he forgot to file a form, or checked the wrong box. According to the SEC he is charged with violations usually associated with con men.  And according to the SEC he didn’t do it just once:

“The complaint also alleges that in November 2013, Magna Equities II, which was also wholly-owned by Sason, and Manuel, purchased another fake promissory note from Pallas Holdings. Magna Equities II and the note’s issuer, NewLead Holdings, Ltd., later agreed to retire the fake debt in exchange for shares of the issuer through a court-approved settlement agreement. To obtain approval of the settlement, Sason and Magna Equities II falsely swore to the court that the fake promissory note was a bona fide debt of NewLead. Kautilya “Tony” Sharma and Perian Salviola, who controlled Pallas Holdings, are alleged to also have participated in the scheme.”

It was shortly after this Sason reportedly invested 3 million in Pledge Music.

Read the post on The Trichordist

Another Loose End: PledgeMusic’s Non Profit Messaging But For Profit Motive

If you had to summarize the now bankrupt PledgeMusic’s public face, you might say that they were all about the greater good of artists rather than making money.  In other words, the company showed the world a kind of do-gooder public face commonly found in non-profits.  But always remember that Pledge was not a non-profit, they were a for-profit company.  And as the facts start to surface, they were apparently very much a for-profit company.

Reviewing the PledgeMusic documents filed with Company House in the UK (where private companies file certain documents) we find a debenture, or loan document, filed by PledgeMusic.com Limited as borrower and Sword, Rowe & Company as collateral agent.  We know what a borrower is.  A collateral agent is usually a lender which takes on administrative responsibilities for a loan syndicate.

Pledge Debenture

So I found that reference to be a little odd for a company that was scraping by on 15% of artist campaigns.  What was even stranger was the date of the loan:  February 12, 2019.

What was PledgeMusic doing borrowing money in February, mere weeks before it went into “administration” in the UK–roughly the equivalent of bankruptcy?  Who–besides the shylocks–would loan them money?

So who was in that loan syndicate?

facility agreement

PledgeMusic entities were both the borrower and a lender on the same loan, which by the look of the document was secured, which means whoever owns PledgeMusic SPV I, LLC was a secured creditor in PledgeMusic.com Limited and would at least arguably have a priority in bankruptcy.

Pledge SPV

The reference to “SPV” is very likely a company operating as a “special purpose vehicle” which is a way to shelter assets in the through-the-looking-glass bankruptcy rules.  As I understand it, SPVs can have a legal status as a subsidiary that makes its assets secure even if the parent goes bankrupt.  (There is, of course, the question  I don’t know the answer to of whether SPVs are recognized in UK insolvency law and administration.)

The debenture spells out that the lenders have a “first fixed charge” over assets of Pledgemusic.com Limited including a lot of bank accounts in both the US and the UK.  A “first fixed charge” looks to be something like a first position security interest, meaning that the lenders get their money back before anyone else.

Charged Accounts

This may be important if, as has been reported, Pledge failed to maintain a separate escrow account for the artists’ pledges and simply co-mingled all of Pledge’s money with the artists’ money.

But follow the next step:  By using the SPV method, it is possible that Pledge might try to extract the money from its own accounts to repay the loan that it made to itself (along with the other lenders in the syndicate) by foreclosing its security interest on its own bank accounts in which it co-mingled funds.

Bank Account Security.png

Of course, if the artists’ money was held in trust that the officers and directors breached, then the co-mingled funds didn’t belong to Pledge so couldn’t really be legitimately subject to a security interest as that portion of the funds shouldn’t be “standing to the credit of such accounts.”  And good luck sorting that one out.

Regardless of how all this turns out, the introduction of an SPV is a relatively sophisticated financing structure for a company like Pledge that leads one to think that someone was thinking about how all this would end up.  Whoever that someone was, they intended to be in the black and not in the red when the music stopped.

It seems like someone had a plan, and they had the plan because Pledge was very, very definitely a for profit effort.  I think that you really have to look at the entire situation skeptically until proven otherwise.  Because if they did not have a plan, then what explanation is there?

@digitalmusicnws: I’m a Former PledgeMusic Employee. Allow Me to Spill a Few Beans…

[Editor Charlie sez:  How do you say “ponzi”? “A&R and Campaign Managers were only told to “launch launch launch” new campaigns so that payments could be distributed to other projects. They very well knew that they were unable to pay artists, but needed to launch new campaigns in order to gain more revenue. Employees knew that this was not ethical, but at the end of the day had no choice. “

What really happened at PledgeMusic?

Here’s an email from a former employee, received earlier this week.  Last week, PledgeMusic announced its intentions to declare bankruptcy, while offering no assurances that unpaid artist balances — potentially in the millions — would be repaid.

As a former employee at PledgeMusic, I have information that is useful for anyone who is interested in knowing more details about what happened to the company.

1. Dominic Pandiscia is the one to investigate….

Read the post on Digital Music News

@hypebot: Industry Calls For Gov’t Investigation Of PledgeMusic As Crowdfunder Enters Administration

[Editor Charlie sez:  Since no US-based artist rights organization has stepped up, the subheadline could easily be “Where is the US response?”]

UPDATED: UK Music CEO Michael Dugher is leading a music industry campaign demanding that Small Business and Consumer Minister Kelly Tolhurst refer PledgeMusic to watchdogs at the UK’s Competition and Markets Authority.

“UK based PledgeMusic is entering Administration, the UK equivalent of bankruptcy. The company suspended all crowdfunding campaigns on February 4th, leaving hundreds of musicians globally owed between between $1 and $3 million….

The UK Musicians Union is asking musicians who are owed money through the platform to contact them.

Read the letter here

Read the post on Hypebot