Seeking to cash in on the growing market for legally downloaded music, Digital Music Group, which sells digital music recordings to online music stores, said Friday it plans to raise $36 million in an initial public offering.

The money will enable the Sacramento, California-based company to quickly buy up libraries of songs for which digital distribution rights haven’t been claimed.

Digital Music Group was founded under the name Online Music Corporation in April. As part of the IPO plan, the company will acquire Digital Musicworks International, with which it shares much of its management team, and the digital music distribution arm of Rio Bravo Entertainment.

Those companies combined posted a net loss of $866,172 on revenue of $223,672 for the six months ended June 30, according to a U.S. Securities and Exchange Commission filing.

The company is essentially a digital music wholesaler. More than 80 percent of the company’s revenue comes from Apple’s iTunes Music Store. Other customers include RealNetworks, Napster, Wal-Mart Music, Yahoo Music, and MSN music.

Digital Music Group is looking to expand its offerings before competitors do. Some 51 million music recordings are indexed in leading industry database Gracenote, noted Digital Music Group, but only 2 million tracks are available on iTunes. The firm, which now only has 200,000 recordings to its name, says it can close that gap by acting as the middleman for digital distribution deals.

It plans to use the IPO proceeds to make up-front payments for the long-term rights to back catalogs, out-of-print recordings, independent label recordings, and live performances.

“It’s a race, basically, to clear those digital rights,” said Gartner analyst Mike McGuire. “They’ve done some work to find that there are some interesting catalogues out there to be had. When you don’t have to print CDs, you can very quickly leverage different opportunities—whether it’s ring tones or other uses.”

So why an IPO? “It’s a good way to raise some money pretty quickly,” said Mr. McGuire.

I-Bankers Securities will underwrite the offering. Digital Music Group plans to list on the Nasdaq under the symbol “DMGI.”

Top-Selling ‘Oldies’

Digital Music Group acquired the rights to more than half of its 200,000 recordings in September, but just 17,000 of them are currently available for sale. Top sellers are songs by Fats Domino, the Tams, and the Foundations.

While Digital Musicworks International, one of the firms that will be rolled into Digital Music Group, had earlier billed itself as an “all-digital label,” that business has been deemphasized. Digital Music Group said it manages the original recordings of just 10 artists.

CEO Mitchell Koulouris declined comment on the IPO, and CFO Cliff Haigler would only say the company plans to go public because “the management believes the digital music space is very interesting.”

Though single-track downloads tripled worldwide to 180 million in the first half of 2005, online music services still amount to about 1 percent of total music sold. But there’s a lot of music that’s just not available online.