Ticket Resellers’ State House Campaign Raises Resale Royalty, Securities Law and Money Laundering Issues
Entertainment Law & Finance, May 2023
StubHub brought Silicon Valley lobbying tactics to the Georgia Legislature with HB 398 and SB 183 earlier this year but thankfully they didn't put one over on the Members of the Legislature. The stated purpose of these Georgia bills is to remove resale restrictions on concert or athletic tickets and limit the resale to reseller market places like Stub Hub. This would, among other things, effectively have prevented artists from taking tickets off manifest for resale through their fan clubs, including at face price.
HB 398 and SB 183 are dead, but this outbreak of sanity and common sense was helped along by the testimony of Mala Sharma of Georgia Music Partners and David Lowery (who lives in Athens and teaches at the University of Georgia at Athens Terry College of Business). The discussion at the legislature regarding property rights and tickets was brought back to focus on the initial sale and the rights of the performing artist or sports team to control transferability in the first place as an essential property right.
Resale Royalties for Artists and Venues
Mala and David mentioned a very interesting concept in their testimony: Should resale royalties be paid to artists and venues when tickets are resold? To my knowledge, this has never been done, but such a resale royalty might encourage artists or sports teams to permit transferability for some or all of their tickets. It would also help to value that property right. So how would that work?
David Lowery made this statement in his written testimony:
Paying it Forward: Resale Royalties for Scalpers: StubHub may refuse to police itself but the State of Georgia can recover some of the value of StubHub’s free riding by establishing a resale royalty to be distributed to artists and venues for transactions occurring in Georgia. This is a very intriguing idea that would essentially force scalpers to return some of the value they have extracted from the artist’s brand. I speak of the resale royalty as returned to artists and venues, but I am program-agnostic. The payment should also be returned to the performers, universities, or taxpayer funded venues around the state.
The resale royalty could be a way to continue to support communities that were hard hit by COVID and venues that survived based on the Save Our Stages funding. It would be better to find this support from free-riders than from hard working Georgia taxpayers.
The "free riding" reference is to StubHub making a market for ticket resellers who price tickets far, far above the price set by artists, and then capturing the value of the artist and venue's marketing efforts and brand value without ever contributing to the brand investment or marketing spend. A resale royalty paid by scalpers would help rebalance the investment by taking a share of the reseller's gross income.
How would that work? Here's some draft language that might be a starting place referring the collection and distribution to Georgia's Department of Revenue, which is sort of the State-level IRS. I chose 5% as the base rate, but that could be more or less.
A ticket marketplace or other commercial reseller shall remit and pay a minimum resale royalty on all sales of tickets for which the reseller is required to pay sales tax in this State. Such minimum royalty shall be calculated as the greater of an amount equal to five percent (5%) of the total price paid by the seller of the ticket, inclusive of fees paid to the ticket marketplace, or the royalty uplift. The royalty uplift is calculated by dividing the total price by the face price of the ticket concerned, and multiplying the quotient by five percent (5%). By way of example and without limitation, if the face price is $100 and the total price is $500, the quotient is 5 and the minimum resale royalty is 25% of $500.
The minimum resale royalty shall be paid by the ticket marketplace reseller to the Department of Revenue accompanied by an itemized statement setting forth the athletic team, performing artist, or charitable organization promoting or performing at the ticketed event as reflected on the face of the ticket. The Department of Revenue shall pay 50% of the minimum resale royalty to such athletic team, performing artist, or charitable organization promoting or performing at the ticketed event and 50% to the venue at which the event occurs. The Department of Revenue shall promulgate appropriate forms and regulations to implement such payments.
Private individuals selling or gifting tickets outside of a ticket marketplace or other commercial reseller shall not be required to pay the resale royalty.
It's important to note that this approach does not interfere with the property rights concerned in the transaction. First, the artist (or venue) selling the ticket may still set the terms of the ticket sale including both the price and the transferability. If the artist does not want the ticket to be transferable, they still have the right to set that prohibition. If they do allow the ticket to be transferrable, then a resale royalty rewards them for that decision to give up their right to make the ticket nontransferable. This may actually motivate more artists to permit transferability. Because the resale royalty is conceived as a minimum, the artist could always elect a higher resale royalty than 5% as a condition of transferability.
Neither does the resale royalty interfere with property rights of the ticket buyer or seller once the artist permits transferability.
Because the ticket marketplace already pays a sales tax to the Department of Revenue (or comparable state agency) the resale royalty would simply be an additional payment at a slight incremental cost. Of course, processing the resale royalty would simply be a cost of doing business for the marketplace (like StubHub), so no service charge or ticket fee could apply to reduce the royalty payment. The Department of Revenue is in a better position to track down the artists and venues, particularly artists who reside in Georgia and venues located in Georgia since they already pay income or other taxes to the Department of Revenue. Plus the Department of Revenue handles unclaimed property in Georgia so could retain any unpaid royalties.
This seems like a novel approach to protecting the investment of the artist and the venues, including taxpayer financed community centers and arenas in tertiary markets.
Anti-Money Laundering Rules
David also highlighted the need for anti-corruption measures to discourage money laundering through ticket resellers:
Anticorruption Protections: When observing the amount of money and the number of high value transactions fixed by StubHub and other online marketplaces—effectively in cash—I am struck by the potential for bad actors to use the platform to hide cash transactions. I see no reason why StubHub should be treated differently than a bank in reporting these transactions to authorities such as the Georgia Bureau of Investigation or the Department of Revenue.
I would encourage the Committee to work with these agencies to determine the need for more detailed reporting of the origin and destination of higher dollar transactions, such as $10,000 in a single deal or series of deals closed by StubHub and its progeny.
One idea would be for a ticket marketplace or other commercial reseller to report to the Department of Revenue (or state sales tax agency) all transactions by any one buyer or seller of tickets that exceed $10,000 in any 12 month period. That reporting could include the name, address, and bank or credit card information for each such seller or buyer and any other information required by the Department of Revenue.
Securities Law Issues
It is also worth noting that some marketmakers allow for the sale of a future contract for tickets that have not gone on sale as yet. The future contract (like an option or a commodities future) allows someone to purchase the right to buy a ticket once the tickets are offered for sale. This seems to implicate securities law issues, broker-dealer regulations and potentially the general solicitation rule.
This subject did not come up in the legislation itself, unsurprisingly, but it did come up in the discussion during the bill’s markup before it was tabled.
There does seem to be a question as to what to call this future contract and if any federal or State securities laws are implicated.
Ticket resellers appear to be behind a number of state bills that were introduced and that are winding their way toward resolutions as state legislatures reach the conclusion of their 2023 general session (e.g., “sine die” which has already occurred in Georgia and is about to occur in Texas, see attached grid).