The Conglomerate is mad at the NYT’s "The Ethicist:"

Anyway, this Sunday Cohen is asked by Patrick Hebron of Brooklyn whether it is "ethical" for him to give a young artist friend $9,000 in return for a 1% share of his "lifetime earnings" no matter what time of work the artist does.  Cohen claims that this is not unethical but might be a bad deal for the investor.  Cohen likens this arrangement to three things, which should raise red flags.  First, Cohen likens the arrangement to "investing in a corporation."  Bingo!  And we call that buying a security, which are required to be registered with the SEC unless covered by an exemption.  So, Mr. Hebron, Cohen has just given you the go ahead to possibly break the law.  Cohen, who seems to focus on whether this creates an indentured servitude aspect, says the arrangement are like the Bowie bonds.  But of course, the arrangement is nothing like the Bowie Bonds, which are the mere securitization of royalties from songs already written and recorded.  The moral hazard of the artist that Mr. Hebron is worried about is not present in the Bowie Bonds.  Cohen also likens the arrangement to "French Open tennis champion Ana Ivanovic, who received the backing of a Swiss businessman when she was 14 in exchange for repayment if she hit it big one day."  The businessman actually became her business manager and covered her expenses with an interest-free loan, hiring a coach for her and setting her up in Switzerland after she had to flee from Serbia.  That’s called a loan.

And, indeed, it looks like an exception would apply under Regulation D, given the size of the offering and the number of people solicited. (Moreover, the person arguably violating SEC rules is the artist, not the investor).

As for Bowie Bonds, The Conglomerate has Cohen dead to rights, there is a definitely a distinction between offering part of the royalties for finished songs and offering future royalties for the whole future.

I think the bigger issue here is one of contract drafting. The artist has art, and possibly talent, but no money. The investor has money. Surely there’s a reasonable, ethical way for the two to work together? Why not, say, put an upper limit on the contract? "Such royalties not to exceed $100,000."

That’s what eventually happened when this was tried before with the Yale Tuition Postponement Plan:

Yale University officials said today that they would erase the remaining debts of alumni who borrowed money in the 1970’s under two programs that were meant to further altruistic careers like missionary work but instead saddled some students with years of payments.

About 3,900 alumni from the classes of 1971 to 1978 received loans under the Tuition Postponement Option or the Contingent Repayment Option. For each $1,000 borrowed from the university, the students pledged 0.04 percent of their future earnings for 35 years, or until the whole class paid off its aggregate debt, whichever came first.

‘It had some of those bents of the 1970’s: ‘Hey, let’s all take on the loan and those among us who become the wealthy industrialists will carry the burden for the rest,’ ” said Juan Leon of Norcross, Ga., a 1974 graduate.

Mr. Leon, who today sells airplanes, borrowed $1,700. He has repaid roughly $7,000, yet he still owed the university money because some classmates failed to make payments.

His experience was not unusual. The programs doled out $8 million in loans, but despite paying about $25 million in principal and interest, no class has paid off its debt because about 20 percent of the students fell into default.

At some point it became silly, which is the worry of Cohen and the person who wrote in. So why not add an "in case of silliness" clause? Then you can both reach a fair and appropriate value for silliness and move on with your lives.