The Investment Pool is the primary mechanism through which Issuers, such as artists, labels, or rights holders, raise capital on Music Protocol. By issuing Royalty-Linked Notes tied to future cash flows from their music catalogues, Issuers can access financing from Investors.

To create an Investment Pool, Issuers propose key terms, including:

• Underlying Asset Identification: The music catalogue’s cash flow and distribution deals that will generate the royalties assigned to the Investors.

• Expected Yield: The estimated return based on projected royalty income.

• Payment Period: The maturity of the deal and the frequency of royalty payments.

• Underperformance Terms: Optional clauses specifying measures in case of underperformance, such as extending the maturity period.

• Capital Requirements: The minimum and maximum amount the Issuer seeks to raise from Investors.

• Underwriter Due Diligence Report: A comprehensive assessment prepared by the Underwriters, evaluating the catalogue’s historical performance, projected income, and overall risk profile.

• Third-Party Due Diligence Report: An independent external review provided by a third-party firm, which validates the financial assumptions, projections, and overall quality of the catalogue and investment terms.

• Risk return profile: this parameter is defined by the Underwriter according to all the due diligences attached.

When an Investment Pool is ready, Investors can review the terms, assess the accompanying due diligence documents, and decide whether to allocate capital based on their risk preferences.

Issuers are required to stake $RECORD tokens when creating an Investment Pool. This stake acts as a commitment signal and helps cover the Underwriter’s review cost. The remaining stake is redeemable once the Issuer repays the borrowed capital in full.

This dual-layer due diligence process—combining internal review by Underwriters with independent third-party assessments—ensures that each Investment Pool is thoroughly vetted, transparent, and offers investors the documentation needed to make informed decisions.

Investors assess the opportunities within the Investment Pools and provide capital with the goal of earning returns. Each investor is responsible for managing their decisions and ensuring appropriate diversification. However, the system allows investors to act similarly to fund managers, enabling them to manage third-party capital. Music Protocol will also offer a fund that operates under a tailored model to ensure both diversification and liquidity, leveraging the Liquid $RECORD model (see the section on $nRECORD).

To track the contributions made by different participants, investors are issued an NFT upon supplying capital. This NFT records the amount contributed and monitors the proportion that has been redeemed. At any point, investors or participants in senior positions can use their NFTs to redeem their specific portion of available repayments from the pool.

Risk Sharing Pools are designed to protect investors' capital in the event that an Investment Pool underperforms. Underperformance occurs when the cash flows from royalties are lower than expected, leading to a return on investment below the anticipated rate or, in extreme cases, a loss of the invested capital. In such cases, the Risk Sharing Pool mechanism steps in to mitigate or prevent investor losses.

The Risk Sharing Pool is a smart contract where participants can stake $RECORD tokens, earning a yield determined by the protocol's governance (e.g., an APR of 100%). The $RECORD tokens staked serve as risk capital for all active Investment Pools on the protocol, meaning they can be used to compensate investors in the event of capital loss.

The Underwriter provides thorough due diligence, evaluating the music catalogues' historical performance, risk factors, and future potential, ensuring that the pricing and terms of the notes are accurately set.

To compensate Underwriters for their expertise and effort, Investment Pools apply an origination fee that is paid to the originator of the pool. This fee can be structured in one of two ways:

• Percentage of the capital raised: In this case, the fee is paid immediately to the originator’s wallet upon closing the capital raise.

• Percentage of the interest: Here, the fee is distributed to the originator according to the payment schedule of the deal.

This fee structure ensures that Underwriters are appropriately compensated for their role in mitigating risks for Investors while promoting high-quality investment opportunities within the protocol.