INTELLECTUAL PROPERTY FINANCING: ISSUES AND CHALLENGES
1. INTELLECTUAL PROPERTY
FINANCING: ISSUES AND
CHALLENGES
Dato’ Mohamad Bustaman Abdullah
Advocate & Solicitor
Registered Agent for Patents, Trade Marks & Industrial Designs
2. • Background
• The concept of “Property”
• Challenges and Issues
• The Purposes of Financing
• Financing Concept & Models
• Risks Management
• Due Diligence
• Valuation
• Security/Collateral
• Recovery
• Q & A
AGENDA
3. • IP and related intangibles are a
vitally important asset class for
business value and economic
growth potential. Transactions
across a range of contexts show
that they can be leveraged to help
overcome an absence of tangible
security. However, they are often
poorly understood – by businesses
that own them, as well as
financiers that could be benefiting
from them - Banking on IP? The
Role of Intellectual Property and
Intangible Assets in Facilitating
Business Finance (Report for the
UK Intellectual Property Office),
2013
4. Concept Start-up Growth Expansion
Sales
Investment
Risks
Angels
Grant
Seed-Fund
Venture Capital
Public Market
6. • IP is property, and therefore it is conceptually capable of
being bought, sold and licensed: there is a close analogy
with real estate. The disadvantage the banking sector
imposes is to attribute zero value to this entire asset
class. It follows that the advantage of recognising the
value of IP would be to dramatically increase the value of
the asset class and to create ‘liquidity’ in line with other
assets.
Banking on IP? , The role of intellectual property and intangible
assets in facilitating business finance , Final report (2013) UK IP
Office
15. Banking on IP? , The role of intellectual property and intangible
assets in facilitating business finance , Final report (2013) UK IP
Office
• The equity stakeholders are primarily interested in growth. If
things don’t work out, the secondary exit route is that the
investors put in more money; some sort of sale would be a
third exit, and not one we would contemplate lightly.
• Historically, IP has rarely been used as security for debt
financing and where it has been used, this has been in
addition to security taken over intangible assets almost as a
catch-all security provision with little acknowledgement being
given to the value of the IP... evaluation of IP as specific
collateral has not generally occurred.
16. Banking on IP? , The role of intellectual property and intangible
assets in facilitating business finance , Final report (2013) UK IP
Office
• The difference between debt and equity relates to
risk and return, or rather, the level of return
people think should be provided. Banks do not
think they can charge enough.
• The role of intellectual property and intangible
assets in facilitating business finance for the risk
they are taking, as they perceive it. However, debt
providers also have ways to mitigate this risk by
funding sales and suppliers.
17. Banking on IP? , The role of intellectual property and intangible
assets in facilitating business finance , Final report (2013) UK IP
Office
• Since the intellectual property will be needed by the
mortgagor in its business, it will usually be necessary for the
mortgagee to grant a licence-back to the mortgagor and
this may also include giving the mortgagor a further power
to grant sub-licences which could prove to be problematical
for the financier.
• This is often a blunt instrument as it will involve the financier
in the management and future commercial exploitation of
the asset which few lenders could exploit themselves so, in
practice, they would need to licence back the right to the
debtor..
18. Banking on IP? , The role of intellectual property and intangible
assets in facilitating business finance , Final report (2013) UK IP
Office
• Different finance techniques may be used in this area.
On one hand a lender may make a secured loan to an
operating business which owns and uses valuable IP as
part of its day to day operations. On the other hand, it
is possible for IP to be the subject of a securitisation
transaction in the capital markets if the IP rights have
a very predictable revenue stream. A lender will need
to be satisfied that it has sufficient control as well as
security over the IP assets it has identified.
22. Musical Work
(Composer)
Literary Work
(Author)
- Sound
Recording
(Recording
Label)
- Performer’s
Rights
- Mechanical
Rights
Film Works
(Author &
Producer)
Broadcasting Work
(Broadcasting Stations)
Bundled/Multiple Rights in Copyright Works
26. The Valuation Pyramid: The Foundation
The Foundation of IP valuation analysis consists of
Solution
Methodology
Profile
Foundation
Legal Business Financial
•Recommendation
•Report
•Testimony
Purpose Description Premise Standard
Figure 1
The Valuation Pyramid
Income
Transaction
Option
Cost
Deliverable
Copyright, Paul Flignor 2006
27. Purpose – Why are we
valuing the asset?
Description – What is the
asset?
Premises –How will the
asset be used?
Standard – Who is the
assumed buyer of the
asset?
Foundation of
IP Valuation
31. Banking on IP? , The role of intellectual property and intangible
assets in facilitating business finance , Final report (2013) UK IP
Office
• There are no legal difficulties with granting security over IP -
just a perception gap. Security gives you the ‘long stop’:
charges can easily be applied to registered rights, but drafting
warranties and covenants that balance the needs of the parties
requires care and attention.
• Copyright can be harder to identify, but is relatively easy in
some areas, such as software (which can then be put into
escrow for example). Other unregistered rights are more
complicated, but the challenge can be met.
• Depending on circumstances, the international dimension will
be important because IP is global. The sort of things that need
to be confirmed are local bankruptcy laws, which can impede
the administrator’s ability to enforce.
