intellectual property financing: issues and challenges
TRANSCRIPT
INTELLECTUAL PROPERTY
FINANCING: ISSUES AND
CHALLENGES
Dato’ Mohamad Bustaman Abdullah Advocate & Solicitor
Registered Agent for Patents, Trade Marks & Industrial Designs
• 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
• 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
Concept Start-up Growth Expansion
Sales
Investment
Risks
Angels
Grant
Seed-Fund
Venture Capital
Public Market
THE CONCEPT OF PROPERTY
• 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
Patent Trade marks Copyright Industrial Design Trade Secrets
INTELLECTUAL PROPERTY
CHANGING VALUE OF PROPERTY
Limited liquidity
High administrative cost
High risk perception
Valuation
Commercialisation
To create and market new IP
To acquire IP from third parties
THE PURPOSES OF FINANCING
Project (Asset) Financing
Working Capital Financing
FINANCING CONCEPT
Creator/Transferor Lender 1
Lender 2
Lender 4
Lender 3
End-User
Sub-Transferee
Transferee
Other End-Users
Other Sub-Transferees
Other Transferees
Rights
Rights
Rights Royalties
Royalties
Royalties
ASSETS (PROJECT) FINANCING
Pre-Purchase Assets
Post-Purchase Assets
Inventory Equipment
Receivable Intellectual
Property
Borrower’s Business
WORKING CAPITAL FINANCING
IP FINANCING MODELS
Equity
Debt
Assign and Licence Back
Hybrid
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.
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.
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..
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.
Risks Management
Due Diligence
Valuation
Repayment
Insolvency
Recovery
RISKS MANAGEMENT
Literary
Musical
Artistic
Film
Sound Recording
Broadcasting
BUNDLED RIGHTS – COPYRIGHT WORKS
Translation
Adaptation
Reproduction
Merchandise
BUNDLED RIGHTS – DERIVATIVE WORKS
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
Wireless
Cable
Satellite
Web
DISTRIBUTION CHANNEL (BROADCASTING)
Identify IPR & Owner
Scope & Duration
Territory
Market Demand
Value
Litigation
DUE DILIGENCE
June, 2006 This work is licensed under a
Creative Commons Attribution, Non-Commercial, No-Derivs 2.5 License.
2
The Valuation Pyramid: The Foundation
The Foundation of IP valuation analysis consists of
four building blocks, each with an associated
question:
Purpose – Why are we valuing the asset?
Description – What is the asset?
Premise – How will the asset be used?
Standard – Who is the assumed buyer of the asset?
These foundation questions frame the context of the
valuation and define the focus, depth, completeness
and general working parameters of the analysis. For
instance, a litigation matter requires complete and
thorough documentation whereas for a technology
transfer valuation, a lower level of documentation
will suffice, generally. Moreover, understanding
these foundational questions will ensure the valuation
is performed within the context of acceptable
standards of the field associated with the issue area
and that the valuation will address all relevant
considerations.
Valuation Purpose The Valuation Purpose refers to the primary
usage of the valuation analysis. The purpose of the
valuation defines the legal or regulatory statutes,
jurisdictional court of resolution, acceptable
methodologies and ‘rules of thumb’ that have
developed in that particular field. There are dozens of
reasons why an IP asset may be valued -- six key
reasons are presented in Figure 2.
Transaction Strategy: A strategic purpose for
valuing IP is when one is considering buying, selling,
or transferring the asset in a licensing arrangement or
acquisition. Usually, the transaction strategy end-
purpose is a ‘go versus no go’ recommendation. That
is, at what price am I willing to enter into this
proposed transaction?
Financial Reporting: Valuing IP and other
prescribed intangible assets for reporting on public
financial statements. In 2001 the Financial
Accounting Standards Board (FASB) established
detailed new regulations for the reporting of certain
intangible assets acquired through acquisitions and
business combinations. These regulations specify the
valuation, amortization and reporting of goodwill and
other intangible assets. The end deliverable is
usually a report specifying the value and change in
value of the subject assets.
Litigation: A high-profile purpose of intellectual
property valuation is to compute damage awards in
an infringement lawsuit. The court history for
determining IP valuation for infringement is rather
lengthy, and a separate court system, the Court of
Appeals for the Federal Circuit, is dedicated to
resolving IP disputes.
Bankruptcy: During a corporate bankruptcy and
reorganization, often the most valuable assets
remaining are IP-related. Valuation is required by
the Bankruptcy Court to properly dispose of the
assets and reorganize the company, if necessary.
Solution
Methodology
Profile
Foundation
Legal Business Financial
•Recom m endation
•Report
•Testim ony
Purpose Description Premise Standard
Figure 1
The Valuation Pyramid
Inco
me
Tra
nsa
c tion
Op
tion
Cost
Deliverable
Copyright, Paul F lignor 2006
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
High
Low
Low
High Fair Market
Value
Willing Seller Willing Buyer
Immovable Property
Moveable Property
Intellectual Property
Royalty Income & Earnings
Guarantee & Warranty
Insurance
SECURITY/COLLATERAL
Liquidity
Insolvency/Bankruptcy
Commercialisation
On-going Royalty Income
Force Sale
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.
