SpiralFrog owes $34 million. Investors get nothing?

Attorneys representing defunct music service SpiralFrog have notified investors not to expect any returns. Whatever money comes from liquidating assets will go to a group that loaned the company an "amount exceeding $34 million."

In a letter dated March 17, 2009, the law firm Rattet, Pasternak & Gordon-Oliver delivered that message to an undisclosed number of SpiralFrog investors. A copy of the letter, seen by CNET News, says the group that loaned the money was issued senior secured notes, which gives members of the group priority in any funds collected from the sale of assets.

"In that SpiralFrog's creditors will not be paid in full, there will be no distribution to shareholders," the law firm wrote.

The sum of money only includes the loans the company took to continue funding operations and doesn't include the amount that investors put in. Just where all this money went could shed light on some of the travails faced by ad-supported music services. A source close to the company told CNET on Friday that customers will see their music become inaccessible in two months.

New York-based SpiralFrog ceased operations in recent days and is one of the best-known digital music service to fail. The ad-supported service was wracked with problems even before launching in September 2007. You can find stories about some of them here and here.

A copy of the letter from SpiralFrog's attorneys to the company's investors.

[jean.luc.picard]

People want to own music not rent it, even if the rent is just their eyes on advertising!

[Get_a_life_Leo]

Here's hoping the execs at AIG were big investors.....

[robinkent]

The only outstanding question is; is Mohen going to be held accountable for the lives he's destroyed and the money he's wasted?

[TheGeekReview]

And this is major news how?

Hate to break it to you folks but that's the way the system works. Creditors get paid first, investors, ie equity shareholders, get paid last. That's the risk you take in investing in a non proven business model, start up company.

[fubar22]

Wahoo!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! Somebody who friggin' gets it. Simple economics people.....people who put out money for a start up...paid first...people joining up after the blood, sweat, tears, and money has been put in....paid last...if ever. Metallica said it best.......Sad but true.

[mutualin4mation]

Unless you bought lowest rated MBS and then it's bailout time.

This company is an example of the actions of the company may have been against the stock holders interest. If the company took on too much debt then the stock holders should have sold.

[gggg sssss]

wrong. The lawyers get paid first.

[kaman2525]

I really liked Spiralfrog.com I'm sorry to see it go and I hope someone finds a way to do the same thing but with more advertisements. There is a site/program called KerClink that is doing it right. They offer free games (which the prize is either money (a few cents) or "clinks" (points). While the games are loaded ads are displayed. I emailed Spiralfrog last year and told them that they should show ads while the songs download. Maybe free ad supported music will return.

[streamOG]

hey Kaman2525: wwww.qtrax.com

Free Music.
Legal.
Licensed from All Majors.
Easy to Use.