Intellectual Property Financing - An introduction

• Author: Lucinda Longcroft
• Position: Senior Legal Officer, Copyright and Related Rights Sector

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

Financing practices

Most readers are familiar with traditional IP financing tools such as licensing (royalties) and direct sales of patents or trademarks. Recently, however, companies have found new ways to raise funds using intangible assets: one is by auctioning their IP. Auction houses specialized in this field hold live and online auction events several times a year. An auction enables owners to sell their intangible assets faster to gain access to rapid liquidity and also creates a market for potential buyers of intangible assets which might otherwise not exist. IP auctions are conducted by companies such as Ocean Tomo, IP Bewertungs AG and IP Auctions Inc. In addition, there are online exchanges for IP such as the technology marketplace run by Yet².com and the technology trading exchange run by Tynax.

Another method for utilizing the value of IP is to use it as collateral. Normally, tangible assets such as real estate, equipment and inventory are used to secure asset-based loans, however, the collateralization of IP can also increase the amount of available credit. In cases where borrowers pledge their patents, trademarks or copyrighted works, the collateral pool increases in value and the potential for a successful loan is increased. Some banks also use IP assets as a credit enhancer. The number of such IP-backed transactions is growing, and the increased cash flow associated with the licensing of IP is attracting attention on Wall Street and financial markets around the world.

A legal mortgage is probably the safest form of security transaction, but it also requires that the IP be assigned to the lender with a license being granted back to the debtor. The problem that arises in this context is that the lender becomes the IP owner, and has control over the IP rights. This poses a potential risk for the ongoing business of the debtor, and also for the sub-licensees.

For some years, deals involving the securitization of intangible assets have enabled owners of IP rights to borrow money more easily and safely from adequately...