[Summary/Discussion] Paperchain Series 3

Dear Community:

We are excited to share our latest revolving pool on Centrifuge Tinlake. We again are financing the advance of music streaming revenues to artists from platforms such as Spotify, Apple Music, and YouTube Music. This pool is currently open, with new assets being added to monthly. Here is the investor summary:


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Summary

We are pleased to offer prospective investors the opportunity to gain exposure to cash flows associated with music streaming revenues. Paperchain, Inc. (“Paperchain”) has launched Series 3 of Paperchain Pilot, LLC (the “Issuer”), a Delaware limited liability company, which will offer for sale to investors tokens, as described below, corresponding to certain payment obligations owed to the Issuer by various music streaming and distribution companies backed by proven streaming data.

The Issuer will issue two tranches of ERC-20 tokens: Paperchain Series 3 DROP Tokens (the “DROP Token(s)” or “DROP”, ticker symbol PC3DRP) and Paperchain Series 3 TIN Tokens (the “TIN Token(s)” or “TIN”, ticker symbol PC3TIN) . The DROP Tokens will make up 90% of the total asset pool, which is estimated to be equal to 85,000 Dai, and will be offered for sale to investors on the terms described herein and in the Subscription Agreement provided to prospective investors.

The DROP token will be a senior token that generates a fixed rate of return when deployed in financings. The TIN token will be a subordinated token that will be subject to the first losses up to their full value. Issuer will target a 7% APR for DROP (the “DROP APR”) and the ratio of DROP to TIN will have a minimum ratio of 10% TIN. The TIN Tokens will also be purchased by Paperchain and Centrifuge to demonstrate their confidence in the asset pool and to act as a buffer against losses to investors in the DROP Tokens.

To capture repayment, Paperchain will work directly with Merlin and DistroKid; collective licensing aggregators that represent thousands of record labels worldwide, negotiating licensing agreements with leading streaming platforms such as Spotify, Apple Music, YouTube, Deezer among others. In 2019 Merlin distributed $845 million in music streaming revenue to its members. Merlin only has one line of business which is distributing payments from music streaming services to its record label members.

The Issuer will use Centrifuge, Inc.’s (“Centrifuge”) blockchain protocol system, known as the Tinlake Protocol, to mint the tokens. Issuer’s use of the Tinlake Protocol will be subject to the terms and conditions of that certain Tinlake Protocol Service Agreement, dated as of December 16, 2020 (the “TPSA”), between the Issuer and Centrifuge.

Summary of Terms


About the Asset Originator

Paperchain is the easiest and fastest way for creators and media companies to access their streaming revenue. Our mission is to power the creator-led economy - by giving faster access to creator revenues and opening up streaming data to unlock creator growth and decision-making.

Operating at the intersection of media, finance, and technology, Paperchain connects to the largest media streaming platforms and offers creators a non-dilutive funding model via innovative use of media data streams & investment products.

The Paperchain team brings a variety of media, data and technology backgrounds, coming from companies such as Datalicious (acquired by Equifax), Soundcloud, Backlash Solutions (acquired by Exactuals), Songtrust, Downtown Music Publishing, Jammer, Platform.sh, Limetray and Ambit Energy.

Paperchain is an alumni of Techstars, participating in the Techstars Blockchain Accelerator program in NYC in 2019. Beyond Techstars, our investors include executives in the music industry and finance industry.

Asset Pool Description

The Issuer will acquire, either directly from Merlin or by assignment from Paperchain, invoices generated in respect of factoring transactions with an average invoice size of $25,000, and a 90% advance rate. Paperchain will finance revenue streams owed to KARTEL LTD and FLIP THE MUSIC, and ARIES MUSIC LLC. The majority of funds are expected to be advanced to KARTEL LTD.

Paperchain directly integrates into Spotify’s analytics API and gathers all historical and current streams generated per client and also integrates into Merlin’s accounting system to match historical streams to actual statements. Paperchain’s underwriting technology enables it to perform its Per Unit Rate Analysis to transform the streaming data into recognized revenue insights, enabling instant advances on those future cash flows. Using this model, Paperchain has been able to predict revenue for select record label customers at a 99.93% accuracy rate over the past 15 months.

In this offering, the transactions financed by Paperchain have a counterparty of Spotify and Merlin, the global licensing aggregator Merlin that represents thousands of labels worldwide and is one of the four major payment partners of the music streaming platform Spotify.

Paperchain Series 3 will be a revolving evergreen pool. Upon repayment by the Borrowers the Issuer will distribute any capital requested for withdrawals and then will redeploy the remainder into new loan requests. PC3 will be open for investment and withdrawal on a regular basis based on the frequency of the Net Asset Value as determined by the Issuer. The total value of the pool is expected to grow steadily.

DROP investors will not receive any payments of principal or interest in respect of any DROP Tokens until such time as the Investor elects to redeem such DROP Tokens. Until such redemption, all amounts payable to the Investor in connection with the DROP Tokens will be either (i) held in cash by the Issuer, free and clear of any liens or encumbrances, or (ii) deployed by the Issuer to fund the generation of new Underlying Assets.

DROP investors may redeem all or a portion of their DROP Tokens by triggering redemption of all or a portion of their DROP Tokens (each, a “Redemption Request”). The Investor may submit no more than one Redemption Request per each specified redemption period (each such period, an “Epoch”).

DROP will generate a fixed return of 7% DROP APR and will be protected by the TIN tranche, which will represent 10% of the pool. New Silver and Centrifuge have agreed to invest among other investors in the TIN tranche in order to put skin in the game.

Paperchain aims to continuously grow this pool. As the Issuer is able to perform successful origination and showcase a track record of diligent underwriting Paperchain considers to lower the TIN ratio gradually to a minimum of 10% over the next six months and to make DROP APR adjustments where necessary to be competitive with market rates. All changes to this Executive Summary will be announced 2 (two) weeks prior to the effective date of the change(s).

The offering will be made available to accredited US investors and international investors through a Reg D and Reg S private placement of the Securities Act of 1933. The Issuer intends to utilize Section 506©, which allows for general solicitation of the offering. For international investors, local laws and regulations will apply.

Payment Summary

Payments in respect of advanced revenues will be made pursuant to the TPSA as follows:

  • Paperchain advances the majority of an artist’s monthly streaming revenue income within the first two weeks of the subsequent month… Due to administrative processes, invoice auditing, and payment preparation, the investment term for the pool will be up to 60 days.
  • For borrows using Merlin, Merlin will make direct payment to Paperchain’s lockbox deposit account, instead of to Borrower, removing repayment risk. For borrowers directly connected to Spotify, Spotify will make a payment to Paperchain’s lockbox deposit account.

Collateral Risk

Fraudulent streams and disputed transactions:

  • Artists could set up streaming bots to generate artificial streams. In order to combat this risk Spotify flags potentially fraudulent streams and deems them as non-revenue generating and refuses payment.
  • There is a risk that Paperchain advances payments for streams that are later deemed fraudulent and non-revenue generating by Spotify. This has the effect of reducing the value of the collateral posted for the loan. To protect the investor,
    • The loan issued is only 90% of the value of the collateral
    • The TIN tranche takes first loss risk upon borrower default

To protect against this risk, Paperchain’s data team monitors the daily stream activity of its borrowers and flags anything that is considered abnormal, e.g. percentage increases outside of standard deviation or stream counts that are identical across multiple tracks. Tracks associated with this activity are removed from revenue advancing until the revenue activity is confirmed as revenue-generating.

Investment Risk

In addition to those risk factors provided in the Subscription Agreement, Annex A to this Executive Summary sets forth additional risk factors related to an investment in DROP Tokens. Please carefully read the risks described in Annex A, and the risks described in the Subscription Agreement before investing in the DROP Tokens.

Warning Regarding the Use of Forward-Looking Statements

This Executive Summary contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Executive Summary regarding investments, debt instruments, investment companies, investment strategies, future operations, future financial positions, future revenues, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements may include, among other things, statements about expected rates of return and interest rates, the attractiveness of the Tinlake Protocol and the Asset Originator’s products, the Asset Originator or the Issuer’s financial performance and operations; and general economic developments which may affect the Issuer, the Asset Originator or the asset pool.


There can be no assurance that actual events will correspond with the above forward-looking statements and should in no event be considered a guarantee that those future events, activities, occurrences or performances will in fact happen. The information in this Executive Summary concerning the prior experience of the Asset Originator and the Issuer is not necessarily indicative of the results to be expected in the future.

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