MSMX MusicStockMarket, Inc, Business Plan Summary Disclosure: Please render and distribute the enclosed document freely within your firm. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means — electronic, mechanical, photocopying, recording, or otherwise—without the permission of Ahin Savara. By reading the enclosed document, it is with the understanding that all facts, thoughts, and opinions that lie within are the intellectual property of Ahin Savara. Ahin Savara owns, or otherwise possesses legally enforceable rights to use, all patents, trademarks, trade names, service marks, copyrights, and any applications therefore, graphical user interfaces, net lists, schematics, technology, know-how, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or materials that are used in the business of the Company as currently conducted or as proposed to be conducted by the Company. Description of patents are currently being filed with the United States Government. All patent-pending technology is owned by Ahin Savara to be assigned to MusicStockMarket, Inc. Author: Ahin Savara 123 West 44th Suite 2G New York City, NY 10036 (617) 407-5840 cell phone ahmsavara@vahoo.com10/02/2381 12:25 212-561-2145 QUANTUM VENTURE PTNR PA5E 81/01 Quantum Vontufe Partners, LLC October 2,2001 DearAhinSavara, As I previously mentioned, we would be happy to invest in MSMX with a comvesstar 535 Fm Avenue * 2f* Floor * New York, Hew YD* 10017-3810 Phone: 212.S86.S773 * Fax: 212.661.2145Table of Contents Section Page Number Executive Summary Viability Timeline of MSMX Paradigm Shift Financial Product Specification Discussion Structure and Components of the MSMX Discussion on ability to quantify the value of a MM and its similarities/differences to a NASDAQ Company Characteristics of Pricing/Business Model MM Support Structure and Profit Sharing Review Conclusion Potential SEC Discussion on Form 1 Application Discussion on Potential SEC Application Process and Probability of Getting Authorization for MSMX 3-7 8-14 15-19 19-22 23-29 29-30 31-32 33 34 35-45 46-74 +3.8% 1102.71 +11%. it 251170 •S *2,2% %^ +53.0ft IP +1 2451.36 ; 3301.60 sfl -0.2% .^ + :m -3.08 :,fJ +4 176419 :1102.71 +0.3% 1567.05 976.56 . . +50 2512,70 51209,93 "The Future is NowExecutive Summary Our Mission: MusicStockMarket's (MSMX) mission is to add value to the capital-raising and assetmanaggemen process of a Band/Musician by providing the highest-quality and most costeffeectiv self-regulated marketplace for the trading of "Musician/Band backed" financial instruments, promote confidence in and understanding of that process, and serve as a forum for discussion of relevant policy issues. Specifically, we plan to create and maintain a marketplace for the buying/selling of securities which are pegged to a Musician's future cash-flow stream (via their rights, royalties, merchandising etc)." The Problem: The $38 Billion Music Industry is at a Strategic Inflection Point. Companies such as Napster, ArtistDirect.com, and MP3.com have forced the landscape to change. One issue which has received less attention is the continuing unequal balance of power between Record Labels (RL) —the sole historical provider of capital for the burgeoning music market, and the Music Makers (MM) ~ whom without, there would be no lucrative Industry. Currently, RLs have significant leverage over claims to future Asset "monetization" of most, if not all Bands/Musicians —Music Makers. The inability to raise capital from alternate sources has severely limited the MM's ability to maximize on their fair take of the profits. To this day, it is still a common occurrence to hear about a MM who is suing or in serious re-negotiations with their RL whether it be about a master recording or their next marketing plan for the coming tour. Both Billboard Magazine and New York Times have been recently featuring articles that focus on the current litigation between the MM and RL due to recent events Without access to the Capital Markets, the muscle behind the RLs will only get stronger. With new professionalism and business acumen, MMs such as Madonna, N'Sync, Pearl Jam, Prince, Dr. Dre, Courtney Love, Chuck D. and Phish actively hint to the shifting of power—from Record Companies to Artists. Distribution, Production, Touring, Marketing... all which were basically managed by the RL -are now more and more being successfully coordinated by alternative means. Although RL's will always be a key part of a successful band, their role is being diminished. The Big Five RLs are scrambling to create strategies to maintain their historical position within the marketplace. MSMX fosters an environment where everyone gains within the Music Industry landscape (including the general public). Our Solution: MusicStockMarket, is a think-tank headquartered in New York City, which is applying to the SEC to be a ECN (Electronic Communication Network) for facilitating and monitoring the buying/selling of new financial instruments backed by a Band/Musician. MusicStockMarket, Inc. will be a "niche player" within the spectrum of financial products for the investing public. Just as Merrill Lynch developed an innovative new financial instrument called HOLDRs, MusicStockMarket and its governing body will develop "a new financial instrument" that will generate funds from the public and provide Musicians/Bands with alternative sources of capital. The "Musician/Band backed" financial products will be validated and governed by the people elected to have a"Seat" on the soon-to-be created MSMX (MusicStockMarket Exchange). The Exchange's regulatory activities include the supervision of member firms to enforce compliance with financial and operational requirements, periodic checks on broker's sales practices, and the continuous monitoring of specialist operations. By creating a marketplace for MM's to attract passive investors, MSMX plans to dramatically strengthen the financial and operational aspects of a Band. Accessing the Capital Markets allows the MM to attain more leverage/control when it comes to negotiating future profit-making endeavors. No longer will a MM be limited and curtailed by lack of resources. MSMX creates stability for the MM as well as RL's that want to utilize MSMX. The advantages to an exchange as compared to "one-off securities include: 1. an orderly marketplace 2. liquidity 3. fair price determination 4. accurate and continuous reporting on sales and quotations 5. information on listed companies 6. strict regulations for the protection of security holders. Components/Phases Components: Music Each component has specific agenda points per Phase Legal Each component has specific agenda points per Phase Finance Each component has specific agenda points per Phase SEC Each component has specific agenda points per Phase Launch in Phases Phase 1 Formally apply to SEC for unique exchange and ECN status Solicit Top-Tier Individuals/Representatives to "buy" seat on MSMX (i.e. The Big Five Record Labels, Select Prominent Musicians/Bands, Select Prominent Music Executives, I-Banking Executive and SEC experts). Begin development of regulatory rules and practices for MSMX Define financial products Alpha-testing of MSMX 8-12 monthsPhase 2 Gathering of Beta-Testers Confirm SEC approval and buy-in Coordination of Member Firms Licensing agreements in place Begin PR/Marketing campaign 3-6 months Phase 3 Marketplace goes live 2-4 months The end-product will be the formation of member firms that utilize the MSMX. "A member firm is a company or individual who owns a "seat" on the trading floor. Only member firms are allowed to buy and sell securities on the trading floor. To become a member firm, a company/individual must meet rigorous professional standards set by the Exchange (MSMX)." MusicStockMarket will not only empower musicians/bands, but also allow for the public to contribute and share in the rewards of the ever-changing music industry. Return to Investors: Transactions fees will be our main source of revenue. Ancillary revenue streams will come from: • Listing Fees • Licensing • Data mining Volume of trades is the key metric to assess when evaluating the attractiveness of creating an exchange. The recent growth in NASDAQ and NYSE volume hints to the potential of MSMX.Comparative Share Volume 100% p 4V* to* OWs I 1WO I 19M I 1496 I 2000 NASDAQ exchange hints to the potential of MSMX. Within the past eight years, the exchange has allowed innovative new industries to take a foothold in the Capital Markets. Much of the Internet Economy is listed on NASDAQ. New financial instruments such as ETF's and I-shares are also included which suggests the strong growth in innovative financial products. NASDAQ's success is representative of their growth: • Nasdaq traded over 1 billion shares on 250 days in 2000. • In 2000, Nasdaq's annual share volume was 443 billion; average daily share volume on Nasdaq was 1,8 billion. Nasdaq market share scared to 62% in 2000, exceeding that of the NYSE which had dropped to 37%. • From 1990 to 2000, Nasdaq experienced a 1,227% growth in share volume.Management Team: Ahin Savara, 30 years old, a graduate of Trinity College, with a BS in Computer Science. Has been a recognized expert in Internet technologies and the future of entertainment. Interviewed by publications including the Wall Street Journal, BBC, and The Los Angeles Times as well as being invited to speak at many conferences and universities. One of five founders of IUMA, recognized by Vice President Al Gore through an NIIA award and USA Today as one of the most popular sites on the Internet in 1994. IUMA.com pioneered music on the Internet in 1993 and was recently acquired by Emusic.com (Nasdaq:EMUS). Ahin started his own strategic consulting firm which has done consulting for Fortune 500 companies with regards to Internet issues. Was recently CEO of Filmport, Inc., a leading B2B player within the Film and Television Industry. Has completed one year of Harvard Business School before taking time off to pursue MSMX. Prior to HBS, Ahin consulted for Fujitsu of America as their Entertainment Evangelist. As Chief Executive Officer (CEO), focus is on the strategy and business aspects of MSMX. Additional Members pending... Financing Request: We are seeking $2-4 million in this round to complete the above stated phase 1 launch. We currently have a signed Commitment Letter from Quantum Venture Partners (www.qvpartners.com) to be co-investor in this round.... we are seeking additional financing partners so as to close the round ASAP.Viability Timeline of MSMX 1600's Initial Exchange/Marketplace model 1920's Music Labels sign artists in perpetuity in exchange for a Cadillac. Stealing millions from the original copyright holders/Music Makers 1960's The Beatles list Apple Music Group (their own publishing/record label) on the London Stock Exchange 1975 "May Day", May 1,1975 when fixed minimum brokerage commissions ended in the US. Ushered in the era of discount brokerage firms and began the diversification by brokerage industry into a wide range of financial services using computer technology and advanced communications. 1980's Michael Jackson purchases Paul McCartney's ownership in The Beatles catalog. Reinforcing the concept that Music is a viable longteer investment vehicle. 1980's US Government denies BMI (one of the Big two Music Rights Organizations —the other being ASCAP) the right to be an Underwriter of Music Makers. Reasoning is related to Antitrust issues. Later over-turned. 1990's Musicians/Bands such as Prince, N'Sync, Chuck D., Pearl Jam openly challenge the Music Industry Model. Hinting to the shift in power from Record Label to Music Maker. 1993 I.U.M.A (Internet Underground Music Archive) is the first company to successfully digitize and distribute digital music files over the Internet. 1996 David Bowie and David Pullman Associates pioneer "Bowie Bonds". Asset-backed securities revolving around music is now a hot topic. 1997 Average daily volume of NASDAQ/NYSE exceed highest levels ever. 1997 Instinet, Archipeagelo, Digital Island and other ECN's make there presence felt.1997 Companies such as Emusic.com, ArtistDirect.com, MP3.com evolve as leaders within the new Digital Arena of the Music Industry. 1998 Hollywood Stock Exchange launched. Validating the idea that consumers have an interest in trading stocks based on entertainment—for amusement purposes only. 1998 Merrill Lynch and others push innovative new financial instrument labeled HOLDRs. Soon ETF's/I-shares follow... 1999 The Big Five Record Labels settle Government lawsuit against unfair pricing tactics. 1999 Consumers (especially the teen-age wired generation) are cited by the Wall Street Journal as being extremely active in the Stock Market. 1999 NAPSTER, then Gnutella and other services are launched. Enough said. 2000 .com consolidation occurs 2000 The Recording Artists Coalition takes center stage. The musicmakker' first step to empowerment. 2000 Hero Capital, Inc. is funded by former Netscape executive. First company to receive SEC approval to develop/maintain exchange based on the future revenue of professional athletes. 2000 Enron creates a marketplace/exchange for broadband, water, and other macro-resources. 2001 Congressional Hearings (chaired by Orin Hatch) to resolve music industry strategic inflection point. TVT Records and the two MM's were clearly outnumbered. 2001 Duet and other "digital download" models are agreed to by Five labels. 2001 Napster loses battle to RIAA/Government to protect their service 2001 NYSE incorporates ETF's (aka Diamonds) into their Marketplace. 2001 HollywoodStockExchange is now a subsidiary of Cantor Index Ltd, a leading online financial spread betting firm. Validates MSMX model. 2001 MusicStockMarket begins official launch.Overall, it is the fast evolution of the Financial Services industry and the current landscape within the Music Industry that allows for the viability of MSMX. Financial Services There has been a steady stream of new financial products that have been developed to appease the hungry appetite of the investing public within the past decade. As suggested earlier, the successful rise of asset-backed securities and exchange traded funds is representative of the potential interest in securities that revolve around the MSMX. In addition to this, the recent acceptance by the SEC in authorizing new exchanges is of importance. Nine ECN's, such as Datek's Island, Archipelago and Reuters Group's Instinet account for 30% of all NASDAQ trades. , l.J £. AUC.A4 AH* H Trade ScntusLU". BTRU* Insiuwt C IXOW BU* Market VT MKVT* SIM* H El>l hook RH>1* The majority of Companies currently list on NASDAQ, AMEX and NYSE exchanges as exhibited by the below pie chart.Although growth has occurred in all exchanges within the last Ten years, NASDAQ, in particular, hirsts to the necessity of additional innovative exchanges that may better suit the needs of the listing constituents. "Notice on the below chart the extreme growth, in. listings within NASDAQ by smaller capitalized ventures. One could argue ?hai this growth is due to their historically being -\ iaek of interest by exchanges to embrace such "risk" ventures.Listings By Market Capitalization • Xastlaq lists 2,002 companies with autkei ca[>itatti!aiians of $100 million or ntore iind lists 497 companies toppiin SI btUbn itt market capitalization. • There are over three limes us matiy SlOO-millioft plus companies listed on Nasdaq today as in 1990, an inara*e of' 216%. In 20CK), more than 42% oTaD companies on Nasdaq were i-jlued at nior^ than SHX) million. • "There are over nine limes as many $1 billion-phis comp,mks Imett on MasJiiQ leday as in 1990, a growth factor of S56%. Nasdaq $100 Miflton-Pfus Companies $0ne Bill ton*-Plus Companies Another interesting trend is the different types of companies that are listing on the two largest exchanges.Companies By Industry 2000 Nasdaq Companies 8y Industry 2000 NYSE Companies By industry The pie-chart suggests that NASDAQ has eagerly embraced "new-economy" companies and industries where as the NYSE has stayed its course of only accepting the most stable and robust companies and industries. Companies in the virtual marketplace of the Internet ended up being one of the recent boons with regards to the growth of NASDAQ. Depending how the financial product is structured, MSMX can be positioned as a Fan Based investment opportunity-or it can be for "serious finance" people like Hedge Funds/Institutional Players. If we coordinate the MSMX properly, it will cater to "serious finance" people. Especially if we initiate the MSMX with only Tier 1 and Tier 2 MM's, the probability of our financial product being attractive is quite high. Investing in the MSMX will be looked at as any financial product in the asset-class catered to "highriiskhigh-reward" products (just like Tech Stocks/small caps/biotech's). If someone in their 30's had $100 to invest, a prudent Investment Advisor would recommend that since you are young and probably still earning— that you invest $50 in Corporate Bonds/Government Bonds, $30 in companies within the SP 500, $15 in Nasdaq (Tech heavy) stocks, $5 in International Stocks (for diversification) and finally $5 in extremely risky investments > IPO's/Small Caps > or the MSMX!In other words, we will just be part of the macro-landscape of investment products. The added benefit of being a "band/musician" financial instrument is truly a novelty which hopefully will wear off; there is no doubt that fans will increase the over-all demand for this financial product—but the true virtue of the financial product should be in what it FINANCIALLY GIVES BACK TO THE "passive investor". Since the Music Industry's growth for the last SOyrs has at least equaled (if not surpassed) the growth rate of the SP 500 or the DJIA, MSMX has a serious opportunity to create a robust financial product and investment vehicle. The natural extension of this is to locate industry segments which have evaded the Capital Markets and to properly develop and harness an exchange that will specifically suit the needs of this untapped market. MSMX plans to facilitate this by carefully allying with the necessary Industry constituents while properly administering a regulated marketplace. Music Industry The Internet has changed the rules of the music industry. The roles played by the historical "supply-chain" players are drastically changing. Since IUMA.com put music on the Internet in 1993, the idea of digital distribution became a reality. The recent Napster movement also hints to the consumer need for alternative distribution/pricing models. RL's and the entire Music Industry have been slow to embrace such disruptive innovations. Yet, there is an overall recognition that aspects of the "old music industry" will be changing, if not due to the Internet, than due to the shifting of power from the RL to the MM. Don Henley's Recording Artists Coalition and TheFutureofMusic.org (who currently mentoring MSMX) are both examples of how the MM is slowly creating an independent body to capture and leverage the aggregate value of MM's. In addition to Internet issues, recording artists have other serious contractual problems with the RL. A new artist agreement is one-sided in favor of the RL's. hi most cases, a new artist has little leverage to negotiate favorable terms. Many artists and music attorneys believe that the "standard industry contract" is unconscionable. The current rise in MM and consumer dissatisfaction with the current state of the Music Industry resulted in the necessity of having a Senate Judiciary hearing to address these serious concerns. The current climate hints to the potential success and acceptance of an exchange that assists the MM attain more leverage in directing their asset-base.Paradigm Shift RL = Record Label MM = Music Maker CM = Capital Markets Old Assets = (RL)Liabilities + (RL+MM)Equity Advantages to the Record Label • Provides RL ability to use strong-arm tactics in negotiations due to being only funding source • No incentive to fairly distribute wealth creation of MM's assets. • Helps maintain firm grasp on historical supply-chain New Assets = (RL) Liabilities + (RL+MM)Equity + (MM+CM)Equity Advantages to the Music Maker • Reduces dependency on RLs • Greatly increased bargaining power • Creates a currency for MMs to utilize • Facilitates re-distribution of financing participation Special care has been taken to assure ease of use with regards to the development and deployment of MSMX financial products. The basket of Revenue Streams per MM will come directly from the MM's ownership position within the historical accounting equation. This suggests that minimal interference will occur between the RL and the MM with regards to MSMX. (MM+CM)Equity is by definition has no claim to debtors or the RL. A sinking fund trust would probably administer the profit-sharing per financial product within the MSMX.Hypothetical Example j Acfc M VC, Manufacturer, and Marketing™ Agency | Past Future \Acts asVC\ L"-.~J Capital Markets/Investing Public i RL's will always play a significant role in any successful band. Without their financial backing and in-depth knowledge of the music landscape, most MM's would be lost trying to manage/coordinate all the necessary variables. That being said, with the addition of access to capital from the investing public, MM's stand to compound the effectiveness of all historical functions while expanding to new heights due to having more control of their asset base.Assets = Liabilities Equity CM (Market Value) RL (Book Value) Capital Markets $1M (Book Value), if Multiple of 3x = $3M Multiple of 5x = $5M Multiple of lOx = $10M Multiple of 3Ox = $30M % of MM equity = float Explanation: A band normally gives up most of the claims to the asset base in exchange for a Recording Contract. Distribution of profits based on monetization of assets accordingly funnels mostly to the RL. Historically MM's rarely owned their material. In this example, the relationship is based on a structure where 80% is owned by the RL and 20% by the MM. MusicStockMarket would allow the MM to float a percentage of their stake (20%) while keeping creative control and ownership of their intangible assets. If MM floats 50% of their ownership then $1M would hypothetically be accessible to utilize within the Capital Markets. Once the stock trades in the Secondary Market, if this particular MM has promise and potential for commercial success, the likelihood of the MM's stock trading at a multiple of book value is quite high. MM's new leverage would highly depend on the expectations held by the investing public on the future performance/monetization of the MM. Without the Capital Markets, the MM captures only 20% of the value being associated with their asset-base (2/10)... with it, a MM, who is on the up-and-up and thus trading at 5 times book-value, captures 60% (1+5/10). MSMX Market capitalization will provide the MM with new benchmarks and macro-data to strengthen their position that the MM is the integral part of the entire Music Industry. One of NASDAQ's goals was to allow companies that could not qualify for listing on NYSE to be allowed a listing on their exchange. This resulted in extreme growth as shown within the following chart:Growth tn Nasdsg Market Capitalization 1J30 After an initial start-up phase, where many different classes of MM stocks will be simultaneously listed, the natural flow of additional stocks and the aggregate growth of the total stocks listed on MSMX will potentially mimic the growth of other exchanges.Comparative Index Performance J,SW 3 '•»» a£3 S&PSW 1985 I I I 1990 1 I I I Mt^k-. SW> s^*^-
y itfe m«* 1 33*1 "X ^ 4|*i»i .(?> Many companies that do not meet the above requirements list on the NASDAQ. Although less stringent in requirements, one can argue that it does not cater enough to the needs of a MM.Nasdaq National Market Requirements $75 E or $75 j N7A $5* isitlik UK latest twcal real of 1 trf list 3 &&^il vt*=m S K,'A I'uMk fck>*{ i shares r Made*?* value al puMfc fliHl IM a Essential to MSMX's market structure are the Market Makers. They act as independent dealers who actively compete for investor orders by displaying quotations representing their buy and sell interest—plus customer limit orders—in MSMX-listed stocks. Each Market Maker has equal access to MSMX's trading system, which broadcasts their quotations simultaneously to all market participants. By standing ready to buy and sell shares of a company's stock, Market Makers provide to MSMX-listed companies a unique service. The result of their combined sponsorship helps meet investor demand and creates an environment of immediate and continuous trading. There is a need to cultivate market making firms to provide capital support for MSMX-listed stocks. All will be required to: Disclose their buy and sell interest by displaying two-sided quotes in all stocks in which they choose to make a market. Display both quotes and orders in MSMX, in compliance with the Securities and Exchange Commission's (SEC) Order Handling Rules. Honor their quoted prices and report trading in a timely manner. Failure to do so can lead to disciplinary action.Role of the Market Makei Compete for investor orders Commit capi'.al Maintain inv Seek the other side of a trade Trade en both sides of the narket Generate invsstor interest Types of market-making firms: The retail market-making firm has a retail brokerage network serving individual investors that provides a continuous flow of orders or sales opportunities. This order flow helps facilitate liquidity for the MM's stock and stability in the marketplace. The institutional market-making firm specializes in executing large block orders for pension funds, mutual funds, insurance companies, and asset management companies, among others. The regional market-making firm focuses on both the companies and the investors of a particular region. The regional market maker gives the company the advantage of specialized, in-depth knowledge of the stocks and investors of a particular area of the country, providing more extensive coverage than might be available elsewhere. The wholesale market-making firm trades shares for institutional clients as well as for other broker-dealers which are not registered Market Makers in a company's stock, but need to execute orders in that stock for customers. They help create liquidity for a MM's stock by being an important source of shares for retail, institutional and regional firms. ECN's are also integrated with the MSMX. When a Market Maker uses an ECN to represent an order, the order is first routed through the ECN to check for matches, and is then posted electronically in MSMX as an ECN quote. The forwarded order can then be executed on MSMX or matched with a new order through the ECN. Buy and sell orders which are represented in MSMX through ECN quotes are either public orders forwarded to the ECN by subscribing broker/dealers, or orders from institutions subscribing to an ECN. The best ECN buy and sell orders, or "top of book,"will frequently drive the inside market, meaning they represent the best bid and ask prices for a security. Additionally, ECNs provide institutions and Market Makers with an anonymous way to enter orders for stock into the marketplace. As market participants, ECNs foster heightened competition among Market Makers and further enhance the market's liquidity. The result? Better prices for investors Order Flow On MSMX, each Market Maker competes for order flow by displaying bid (buy) and ask (sell) quotations on screen. When an order is received, the Market Maker will immediately purchase for or sell from his or her own trading account, or seek the other side of the trade until it is executed, often in a matter of seconds. They can also interact with market orders brought to MSMX through ECNs and broker/dealers. Because MSMX distributes trading in a stock among multiple market participants, fluctuations in volume can quickly be absorbed—even on particularly heavy trading days. Unlike the floor-based markets, no halts for order imbalances may occur on MSMX. Pricing On MSMX, a stock price is determined in much the same way as a NASDAQ' listed company's products and services, and is influenced by the following factors: Supply and demand. The demand for a stock, relative to the number of shares which are currently available for trading "float", can greatly influence a stock's price. Just as you can influence demand for products or services through a successful advertising or public relations program, you can increase demand for a stock by increasing its awareness among investors and analysts through a focused investor relations program. External influences beyond your control. Analyst recommendations—about a company, its sector or its industry—can also influence a stock price. Other actors, such as the health of the economy, interest rates, government regulations, the price of gold and other investment fundamentals, as well as news reports, international events—can also be determining factors when it comes to stock valuation. Trading Activity Most exchanges are quotation-driven. Nasdaq Market Makers historically competed for investor orders by displaying their quotations—or offers to buy and sell stock—on screen. On more traditional markets, trading activity is likely to be order-driven, instituted by the flow of incoming orders to buy and sell stock. MSMX is both quotation-and order-driven, and will evolve to incorporate features of what is sometimes referred to as a "hybrid" market.Hybrid Market Screen-based market structure Quote-and order-driven Competing market participants Capital commitment from multiple firms Corporate finance Retail sales Institutional sales Research analysts Continuous order flow Market Characteristics MSMX will mimic the characteristics that have made NASDAQ such a success. Specifically, our structure of multiple market participants. This structure fosters healthy competition among MSMX participants—especially MSMX Market Makers—who help stimulate demand for a company's stock while maintaining an orderly market and functioning under tight controls. In much the same way that multiple distributors help meet increased demand for a company's product, MSMX participants help create increased opportunities for a MM's stock to be bought and sold in an orderly fashion. Through both Market Makers and ECNs, a MM's stock is given greater access to available capital, increased visibility in the marketplace, and market qualities that are conducive to immediate and continuous trading Depth of Market The MSMX will provide MM's unparalleled depth of market through a unique structure of multiple market participants. Depth of market refers to the total number of buyers and sellers within the market, and is related to the amount of capital committed to a stock. MSMX Market Makers provide depth of market to MM's by standing ready to commit capital to stocks in which they are registered and by providing immediate and continuous trading in a MM's stock. ECNs further MSMX's market depth by delivering additional buyers and sellers to the marketplace. Knowing there are willing buyers and sellers in the marketplace means that: Buyers and sellers are willing to trade more frequently. Investors are more willing to hold securities, because they know they can more readily sell them.Liquidity The MSMX will provide MM's with liquidity through a structure of multiple market participants. By encouraging trading among a virtually unlimited number of market participants, MSMX's market structure offers an environment which facilitates greater liquidity—the ease with which MM stocks can be bought and sold without dramatic fluctuations in price. Market Makers enhance MSMX's liquidity by providing investors with ready access to capital and nearly uninterrupted trading in their stock, while ECNs add to the market's liquidity by bringing additional orders into MSMX. Multiple Market Participants and Liquidity Imagine if your city had only one distributor for home electronic equipment—let's call him Mr. Smith. Most likely, Mr. Smith would not commit all his capital to carrying abundant inventory. For the most part, he would buy only what he thought he could sell immediately. And if there were a sudden surge in demand, his prices would almost certainly go up. Conversely, if your city had multiple distributors for electronic equipment, the risk involved in holding inventory would be spread out more evenly, and the overall amount of equipment would be greater. As a result, a change in demand for the equipment would be less likely to have a dramatic effect on price—or the distributors' ability to fill orders. Price Efficiency In securities trading, as in most industries, competition is one of the most important factors in creating price efficiencies. The aggressive competition for orders fostered among MSMX's Market Makers and all market participants helps to ensure investors the best price for the stocks they trade. Transparency For investors and companies, the ability to view trade and quotation information— referred to as transparency—is crucial to the decision-making process. On MSMX, all Market Maker bid and ask quotations in a given security—plus orders from ECNs—are broadcast over the network for all market participants to see, making MSMX a "transparent" marketplace. Spread The term spread on any stock market refers to the difference between a stock's buy and sell price at a given moment in time. On Nasdaq, the spread typically represents the capital commitment Market Makers undertake when buying or selling a stock. There are two kinds of spreads on Nasdaq:Inside Spread: Also known as the "best displayed price," this term refers to the difference between the highest bid and the lowest ask for a stock among all market participants. On MSMX, most retail transactions will occur at or within the inside spread. Market Makers of the MSMX will encompass Music Industry constituents that mimic the "players" who are involved with the NASDAQ marketplace as exhibited below: Knight Securities, UP NITEf Instinct Corporation INCAf Herzocp, Heine. Geduid. inc. HRZC Goldman, Sachs & Co. GSCO Schwab Capita! Market* IP MASH Merrill lynch, Ptera, Fenner & Smith Inc. MLCO Salomon Smith ftarncy Inc. SBSHSpear, Ucds & Kellogg Capital Markets SLICC Tnt Island ECN, Inc. ISLD* Morgan Stanley Dean Witter MSCO Discussion on ability to quantify the value of a MM and its similarities/differences to a NASDAQ Company Some suggest that the future value of a MM is too subjective to actually quantify and allow the investing public to discern good from bad. Companies on NASDAQ, they argue, although inevitably priced by the market's perception of the company's future value, still have underlying metrics which allow a knowledgeable investor a viable means to judge the true value of a stock.One of the most widely used statistics used in evaluating a company before investment is earnings per share. If one is considering investing in a company's stock at a price of $100 per share, you need to know the earnings per share and the annual dividend per share in order to decide whether this price is reasonable. This statistic answers how much earning power and how much dividend income you would be getting for each share purchased. Stock prices actually reflect investor's expectations of future earnings. MSMX would in essence allow the MM to recognize and detail their potential monitization of their asset-base. In the same way a company would be analyzed for investment, a MM could also be judged based on metrics that cater to the Music Industry. In assessing the prospects of a company/MM, we are interested not only in the total amount of earnings, but also in the rate of earnings on sales, on total assets, and on owners' equity, hi addition, we must look at the stability and source of earnings. A breakdown of sales and earnings by major product lines is also useful in evaluating the future performance of a company/MM. The past performance of a Company/MM is critical as well in understanding the inherent value of a stock. Record sales based on Soundscan and RIAA data, Annual Merchandising Sales numbers, Average Annual Royalty per Song or Album, AFM statistics, Concert Attendance figures, Global sales as to US domestic sales... all will be part of the new financial lexicon of a MSMX investor. Overall, an investor would act the same way if she/he invests in a NASDAQ listed company or a person invests in a stock that utilizes the MSMX . They would quantify the value of a MM's stock based on the investor's expectations as to the future profitability of the MM and the risk that this level of profitability may not be achieved.Characteristics of Pricing/Business Model SEC & Legal Complexity < Liquidity of stock Tier 1 Madonna, Sting. U2, Phish, Pink Floyd, Metallic*, The Beatles Tier 2 LinTO Biscuit> Destiny's Child, Dido, Weezer Ice Cube Beading International Tier 4 Undiscovered Garage Band .Soundness of investment: volume of Trades Like Ebay or Enron Marketplace Transaction fee per trade Low overhead and SG&A Incremental cost per new stock is minimal First Mover Disadvantage.... Must Execute Discussion of Tiers Problem: you are a tier 2 band with much success and you're releasing your sophomore album-your concerned that your RL is not allocating enough money behind a marketing push for this new release. You complain to the RL—but your RL says that they have a fixed budget for Tier 2 bands and will not spend any more. They also explain that withintheir vast portfolio of bands, that they only allot "significant marketing budgets" for Tier 1 bands. Solution: by taking yourself/band public, you immediately have capital which can be used for additional Marketing and Advertising etc. No longer are you dependant on the RL for promotion. MM's now can utilize their capital raised from the public for increasing a marketing push or any other aspect of a tier 2 band as compared with a tier 1 band. With regards to "The additional overhead of Audits/Lawyers/SEC is too costly for the intended benefits for Tier 4 & Tier 3 MusicMakers".... it may be that what is suggested is true. It may be too audacious to start an exchange that caters to all "TIERS" of bands. The cost/time/effort that is needed should NOT be Material enough to cause a band to NOT want to utilize MSMX. MSMX should also not want to facilitate Tier 3 or Tier 4 if it is not a profitable component. It may be most wise to coordinate MSMX as an exchange that only facilitates MM's in Tier 1 and Tier 2 . This is applicable to the dilemma of the NYSE had during its infancy— the Dealers at that time only wanted to trade "blue-chip" companies and relegated "non-blue-chip" companies to trading "outside" the building. This actually was the reason/cause of the "Curb exchange" later renamed to American Stock Exchange (AMEX). The point being that if MSMX cannot profitably coordinate Tier 3 and Tier 4 bands within a MSMX than it will not occur. The important thing is that THE EXCHANGE IS organized and OPERABLE . The different "classes" of stock (for example Tier 1 Tier 2 Tier 3 Tier 4 ) will develop/evolve through time and will also depend on the successful launch and receptiveness to the overall MSMX. It would be to our advantage to only focus on MM's that STRINGENTLY FIT the criteria for a successful listing on the MSMX. Successful meaning that the costsdoon' outweigh the benefits and that the listing will be a lucrative opportunity for all involved INCLUDING the OWNERS of MSMX. Grassroots growth will inevitably occur from the Tier 3 and 4 class of stock. With the emergence of Regulation A and Rule 254, MM's have the ability with not much cost to solicit interest from the public for investment. The SEC has allowed this "Small Business Initiative" to relieve the onerous legal and administrative costs associated with a going public and listing on an exchange such as NASDAQ or NYSE. Specifically the SEC says, "Regulation A has been revised to exempt public offerings of non-reporting companies of up to $5 million in a 12-month period and to permit the use of a simplified question-andansswe disclosure document. Companies conducting a Regulation A offering will be able to "test the waters" for potential interest in the company before having to prepare the mandated offering circular." (SEC; RIN: 3235-AD88 Small Business Initiatives )MM Support Structure and Profit Sharing Review A successful MM is part of a team. The Personal Manager, Talent Agent, Attorney, Business Manager and Production Company all play a role in addition to the RL. The historical distribution of profits based on the monetization of the MM's assets have been the following: Personal Manager 10-25% Talent Agent 10% Music Attorney 5% Business Manager 5% Total -32% In other words, the RL is not the only one who captures a significant upside with regards to the monetization of a rising MM. A RL's general practice has been to require Song and Master ownership. The RL likely will insist on acquiring the song and master recording copyrights as "works made for hire." With access to the Capital Markets, a MM has a higher probability of negotiating a better share of the future profits of their musical works. This may ultimately lead to MM who both write and perform to be able to keep both copyright ownership (and administration) and all publisher's share of music publishing income. Otherwise the normal agreement between the RL and MM is the following: Label's Ownership of Masters and Related Rights stem from a typical Recording Contract which states, "Lender acknowledges that RL is the sole, exclusive, and perpetual owner of all masters from inception." Excerpts from the recent hearing before the Committee of the Judiciary, United States Senate, April 3, 2001 provide a good summary of the historical predicament that has arisen between the MM and RL: "Just as you have so insightfully observed, Mr. Chairman, it is as though you have paid off your mortgage and the bank still owns your house ". (referencing the honorable Senator Orin Hatch) "Recording artists have for far too long been insufficiently represented in Washington DC. The RIAA does not speak on behalf of recording artists, even though it gives the impression at times that it does. The RIAA speaks only on behalf of its membership, which is solely composed of major and independent record companies. At this point, there has been little input from the recording artist community. Most, if not all, of the discussions have been between the labels and the Entertainment companies. Yet, the artists are the ones who create the content for distribution. There would be no need for these discussions if it were not for artists and we must be actively involved in the development of the framework, or our interests will not be protected. Artists are simply asking for a seat at the table."In Conclusion Don Henley, a MM and Chairman of the R.A.C. states it best: "The bottom line is that artists create the music that fuels these industries and hence it would appear obvious that our interests and concerns should be seriously considered." (submitted before Congress) The MusicStockMarket and its constituents hope to enable this to occur while continuing to seek guidance from all within the Music Industry, especially the Music-Makers.