CNV1-I1-13-Intellectual Property

IP ASSETS Today IP

can be pooled for revenue generation and owner of IP can get access to the capital market based on its capability of future cash flows. Hence, in many countries Intellectual property is used as collateral for getting loans, which can be used for business operations or financing R&D projects. In countries like US, UK, Japan, Singapore IPRs including patents, trademarks, copyrights are used as collateral in securing finance from investors or banks.

Intangible assets like Intellectual Property are being used for accessing capital to grow the company’s operations. To boost up this trend Singapore Government in 2014 launched the S$100 million Intellectual Property (IP) Financing Scheme targeting companies in the technology sector. Companies that wish to apply for the scheme, must be locally registered and their patents must be already generating revenue. With this IP Financing Scheme, businesses in Singapore can generate money from their IP assets. This will in turn boost up innovations to encourage recognition of IP as an asset class. In Singapore three local banks namely; DBS Bank, Oversea-Chinese Banking Corp and United Overseas Bank have joined hands in the scheme announce by the government. For valuation of IP, the experienced valuers were appointed ie; American Appraisal Singapore, Consor Intellectual Asset Management and Deloitte & Touche Financial Advisory Services. The above three participating banks will share the risk of extending the loans under the scheme. This initiative will pave the way of lending against IP assets as a more common practice.

Intangible assets like Intellectual Property are being used for accessing capital to grow the company’s operations.

INDIAN INITIATIVE

Indian government to give boost to innovation, came out with the national IPR policy by the Department of Industrial Policy & Promotion. This is the country’s first Intellectual Property Rights (IPR) policy, wherein they have proposed securitisation of innovation rights, allowing businesses to use IPs as collateral to raise funds for their commercial use. The policy also suggests financial support for developing IP assets through banks, venture capital, angel funds and crowd funding mechanisms. The IP policy also suggested setting up of an IP exchange to bring investors and IP owners on one platform. The government will extend financial support and easy loans to applicants through banks under the proposed policy.

GLOBAL SCENARIO IP

Securitisation is quite common in countries such as the US and Japan wherein they allow mortgaging of intellectual property assets. Intellectual property could be in the form of patents, trademarks and copyrights. To gain confidence of investor, the valuation of IP needs to be done by a company or an external body by analysing the cost incurred in acquiring it and assessing the cash flow from its usage over the next five years. The first attempt of securitization was made in 1993.

US fashion company Calvin Klein raised USD 58 million with the securitisation of royalties on perfume brands, arising from the exclusive right to use the Calvin Klein trade mark on existing and future products. The other known case is Dunkin’ Brands - owner of Dunkin Donus, a snack bar chain raised USD 1.7 billion by selling bonds backed by (among other things) the royalties it will receive from its franchises. This was the biggest IP securitisation then.

In 2003, Japanese Scalar Co., a venture company holding multiple patents relating to optical technology and engaged in the development of optical lenses, had granted an exclusive license for four patent rights that it owned to Pin Change, Co., Ltd., a venture company within Matsushita Electric Group. Scalar transferred these patent rights to the SPV (Special Purpose Vehicle) and then SPV issued corporate bonds and raised funds backed up by the royalties for the patent rights.

The most well known example of intellectual property royalty based financing is the issuance of 10 year Bowie bonds in 1997 based on future royalties on the back catalogues of pop musician David Bowie. This transaction generated USD 55 million for David Bowie and was rated single A by all major bond rating agencies. The other example is Yale University borrowed approximately USD 100 million based on 70% royalty interest in the patent and licensing agreement between Yale and Bristol Myers Sqibb company based on certain US patent applications.

To structure an intellectual property royalty financing transaction, it may be necessary to create a Special Purpose Vehicle (SPV) similar to those used in creating other asset backed securities.

SPECIAL PURPOSE VEHICLE

To structure an intellectual property royalty financing transaction, it may be necessary to create a Special Purpose Vehicle (SPV) similar to those used in creating other asset backed securities. It is a process of converting something into a ‘Security’ which is a capital market instrument. Hence, in the processing of securitisation there is a pooling and repackaging of assets into financial securities, which can be sold to investors. The result of the process is creation of the financial instrument that represents ownership interest to the investors.

A typical securitisation transaction consists of the following steps:

• Creation of a Special Purpose Vehicle.
• Sale of the financial assets by the originator or holder of the assets to the SPV.
• Securities issuance by the SPV, to investors, against the financial assets held by it.

The legal framework for securitisation in India is evolved with the enactment of the ‘The Securitisation and Reconstruction of Financial Assets And Enforcement of Security Interest Ordinance, 2002’ (The Act). However, the purpose of this Act is to promote the setting up of asset reconstruction/ securitisation companies to take over the NonPerforming Assets (NPA) accumulated with the banks and public financial institutions. The Act provides special powers to lenders and securitisation/ asset reconstruction companies, to enable them to take over assets of borrowers without first resorting to courts.

A variation of such a structure involves creating an IP holding company as a subsidiary of the parent company, where the IP holding company licenses the IPs to third party licensees. An example of a patent backed loan transaction is a USD 17 million financing raised by GIK Worldwide, a small technology company with valuable patents in technology for delivering high speed broadcast quality video conferencing. Instead of tapping the venture capital market, GIK borrowed from Pitney Bowes Corporate Notepad - Volume 1 / Issue 1 / June 2017 25 Capital and collateralised the debt by its patents assessed at USD 57 million. It is also to be noted that in advanced countries the use of SPVs has come under heightened scrutiny after the alleged misuse of SPVs at some high profile corporate failures such as Enron and Adelphia. Accordingly, corporations may need to weigh the negative implication of creating an SVP even for the limited purpose of securitising intellectual property.

CONCLUSIONS

There is a fluid market for the disposal of tangible property. However, the market for IP assets is more limited. A way to improve lenders’ confidence in IP as collateral is for governments to share the financial risk. For example, Singapore and Malaysia have set up government funds to assist with businesses using their IP as collateral for loans. The Singapore government will partially underwrite the loans granted by financial institutions participating in the scheme and offer financial assistance with the cost of valuations.

In securitisation it is possible to come up with a security package, which will legally give lenders sufficient control over the borrower’s relevant IP assets to enable them to take control and realise the assets, if the borrower fails to repay the loan. In case of IP securitisation, the risk for the borrower is the same as in any other asset secutitisation transaction. The borrower may lose the IP asset that it has given as security for the loan because the lender will have the power to sell it upon any loan default. It seems generally accepted that an important issue in using IP rights as security for debt finance is giving the prospective lenders the comfort they need so that if there is a default, the IP assets and any income from the IP portfolio can be realised without any hassle.

Whose copyrights?

A selfie taken by a black macaque (black ape) on the Indonesian island of Sulawesi has become a copyrights war between Wikipedia and the photographer, who has claimed that he is the owner of the selfie. Wikipedia has refused to remove the famous selfie, saying the monkey and not the photographer owns the copyright because the animal took it. It is mentioned in the message on Wikipedia site that “This file is in the public domain because as the work of a nonhuman (animal), it has no human author in whom copyright is vested.” The photographer was clicking photos of crested black macaques in 2011, when one of the endangered monkeys hijacked his camera and snapped hundreds of pictures. Copyright laws protect only fruits of intellectual labour that are founded in creative powers of mind. Here, neither photographer nor monkey used the creative power of mind. Clicking photo was accidental episode, and therefore, neither can claim on copyrights. (Source: Wikipida Commons)