IP financing, or the use of IP assets (trade marks, design rights, patents and copyright) to gain access to credit, is gaining increasing attention in IP circles. Multinational corporations as well as small and medium sized enterprise, are leveraging their IP assets in exchange for finance, and lending institutions around the world are increasingly extending their business to provide loans on the basis of IP. At the same time, a UN institution is currently working with its member states to modernize secured financing practices, and make it easier for IP owners to gain access to affordable credit. This article by an IP specialist at IP Consult 4U GmbH, Switzerland, introduces the topic of IP financing, which is further developed by Jeremy Phillips’ article “10 Commandments for IP Finance” and the articles by Lorin Brennan and Ben Goodger which look into current activities in international policy development relating to IP financing at the UN Commission on International Trade Law (UNCITRAL). Why should corporate top management and policymakers care about IP assets?Or be interested in the latest trends in financing IP assets? Because they cannot afford to do otherwise. IP rights are not only valuable assets but can also be important sources of financing. The desire to enhance innovation is a very important issue for all nations, and access to financing is critical for start-up companies and innovative SMEs. 1 Intangible assets, including IP rights, can increase a company’s asset value, and understanding and valuing these assets will help top management to make informed investment and marketing decisions. Higher asset values may also help in negotiations with a company’s bank and facilitate access to credit, or help to negotiate cheaper interest rates on credits.
Current IP valuation methodologies for securitization are more readily accepted by big banks when major patent or brands are involved. (Photos.com)
These types of deals have been put together by David Pullman of the Pullman Group, a boutique investment firm, that created similar deals for James Brown, the Isley Brothers and the estate of Marvin Gaye. For his role in creating and selling the bonds, Pullman was rewarded with a fee of 10 percent of the deals’ value. The main purchasers of the bonds were institutional investors, such as pension funds and insurance companies as part of their diversified investment portfolios.
In 1997, David Bowie issued 10-year asset-backed bonds on the basis of future royalties on publishing rights and master recordings from 25 pre-recorded albums, and raised US$55 million. (Photo: Jorge Barrios)
While it is widely agreed that music asset-backed securitization has a great deal of potential, the volatility of the market and a lack of understanding of the music business by the investment community are still challenges to be overcome before the practice becomes widespread.
Asset-backed securitization is also well recognized in the field of patents, where the patent can be treated as a commercial asset on the basis of the exclusive legal rights it represents. There are numerous players in this marketplace, ranging from licensing entities composed of single inventors (such as Fergason Patent Properties LLC, an IP licensing and development company founded by Dr. James Fergason, an inventor in the field of liquid crystal displays) to patent brokers such as Pluritas, iPotential and IP Value and institutional patent aggregators such as the US-based company Intellectual Ventures 2 . In addition, IP is increasingly implicated in investment fund activities.
For example, Altitude Capital Partners is a US$250 million private investment fund which invests in IP assets and IP-focused companies, covering patents, trademarks, copyright and royalty streams. The company works with individual IP owners, as well as small and large IP-holding companies. In February 2007, Altitude invested in DeepNines, a network security solutions provider with returns linked to repayment from DeepNines’ IP proceeds and secured by the company assets. In April 2008, Altitude paired with Goldman Sachs & Co. to invest US$11 million in Intrinsity, Inc., a Texas-based IP technology company designing processor cores.
Management interested in using their IP as a source of collateral should gain familiarity with the following intangible asset classes before discussions with the credit grantor:
Cash flow assets:
Assets with implicit value:
Valuation is a key tool in the process of financing based on IP assets. Technical valuations are required of intangible assets to give a point in time value of the IP for the purpose of securitization. The available methodologies for IP valuation work best with individual major patents 3 and brands 4 . So far, no standard methodologies have been developed that are generally applicable to all IP big or small, however company reporting requirements and assessments for taxation may require valuations.
Recent efforts to develop general market-based approaches to valuation include the American Stock Exchange Equity Index based on the value of corporate IP rights, and plans for an IP exchange in Chicago to enable investor and company participation in a broad spectrum of IP-related financial products such as qualified equity listing/co-listing, IP-related indexes, futures and options, IP-backed debt instruments, patent rich company initial public offerings (IPOs) and new IP-based exchange-traded products.
In 2007, the German Institute for Standardization (DIN) published its “General Principles of Proper Patent Valuation” (PAS 1070 (SAB)) to assess the quality of valuation reports and expert appraisals. DIN then formed a working committee and initiated an international standardization project on patent valuation at the International Organization for Standardization (ISO), which will appoint a committee to develop an ISO-standard for patent valuation if all relevant and concerned groups express interest to ISO through their national standardization bodies.
From a legal perspective, it is interesting to note that most jurisdictions still do not offer adequate legal means for financing intangible assets, including IP. While some sectors of academia are aware of these shortcomings, it appears that there is not yet sufficient political pressure to modernize these legal systems. That said, the issue of IP financing is currently the subject of policy development at the international level. An overview of business and government action has been published by the International Chamber of Commerce in Section B-V of the IPRoadmap (English, Chinese, Arabic, Spanish and Portuguese).
In 2000, the United Nations Commission on International Trade Law (UNCITRAL) established a Working Group to address security rights in personal property, including intangible assets. The Working Group was given the mandate to develop recommendations for an efficient legal regime for security rights in goods involved in commercial activity, including intangible assets, and to identify the issues to be addressed, including the form of the instrument and the exact scope of assets that could serve as security 5 .
The decision to undertake work in the area of secured credit law was taken in response to the need for an efficient legal regime that would remove legal obstacles to secured credit and could thus have a beneficial impact on the availability and the cost of credit. In 2007, UNCITRAL concluded a Legislative Guide that contains recommendations for a uniform legal regime for secured financing, which also covers IP financing. This Legislative Guide must be regarded in the context of earlier policies by UNICTRAL, including the UN Convention on the Assignment of Receivables in International Trade and the Model Law on Cross-Border Insolvency.
A successful future for IP financing is a significant step in further development of the IP-based economy:
Enhancement of a company’s credit basis:
Transparency in the credit system, and trust in capital markets:
For market participants, IP financing will be of key importance to achieve their economical goals.
Acknowledgement Lucinda Longcroft, Senior Legal Officer, Copyright and Related Rights Sector.
1. See Intellectual Property and Access to Finance for High Growth SMEs, European Commission Directorate-General for Enterprise and Industry, Discussion Paper, Brussels, November 14, 2006.
2. See Art Monk and Ron Laurie, Inflexion Point, “Business Opportunity Alternatives to Assertion-Based Patent Monetization”, IP Society Seminar: IP Monetization Strategies & Alternatives, November 6, 2007.
4. See, for example, the article by David Haigh: “Brand Valuation: what it means and why it matters” in Brands in the Boardroom, IAM supplement No.1.
5. Official Records of the General Assembly, Fifty-sixth Session, Supplement No. 17 (A/56/17), para. 346 ff.