Intellectual Property, Securities, financing, funding, copyright, trademark, patent.
By Michael Popoola
Funding is a major driver of economic growth and development. Whether you are a country, start-up, or a fledgling company, access and the ability to raise capital can actualize or undermine your goals. The essential nature of funding in business actualization pushes corporations and, sometimes, countries to take loans. However, loans sometimes need collateral and must be repaid, which is where problems arise.
For some, securitizing loans may be seamless as they have several assets that can serve as collateral. Small businesses and startups may be less fortunate. Lenders need assurances about the business's creditworthiness. Secondly, you must provide collateral that the lender can move against should you default in repayment.
This article considers the viability of securitizing loans with intellectual property rights to facilitate small businesses' access to capital in the lending market.
What is Intellectual Property Financing?
Intellectual Property Financing (‘IP financing’) refers to using intellectual property assets as collateral when borrowing money. This raises the question, what are intellectual property assets? The World Intellectual Property Organisation (WIPO) defines Intellectual property as “creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names, and images used in commerce.”[1] These creations are further protected by law through patents, trademarks, and copyright, allowing their owners to gain reputational and financial benefits.
IP financing may occur in several ways, including where the holder/owner of a protected right uses such right as security for a loan. Examples include Thomas Eddison using his light bulb patent to securitize funding for his company[2]; General Electric and David Bowie securing a $55 million loan with royalties on his music as collateral[3].
IP financing may also take the form of a sale and leaseback, where the lender acquires the borrower’s IP in exchange for the advance sum. The borrowing party then pays a licensing fee for a specific period until the principal and interest are repaid. In a sale and leaseback transaction, the agreement often contains a buy-back clause in favor of the borrower.
With IP financing, the goal is to obtain immediate and advanced liquidation of IP assets. This makes it a viable alternative to Small and Medium Enterprises (SMEs) and large companies with strong IP portfolios.
Why IP Financing?
IP Financing offers several benefits to both lenders and borrowers.
The value of IP assets may appreciate: Unlike tangible assets, which require periodic maintenance and insurance, IP assets offer future marketability and appreciation. As the world continues to move into a knowledge-based economy, the recognition and protection of IP assets are bound to increase, causing a domino effect on the valuation of IP assets.
Securitizing loans with IP assets allow a company to raise capital without creating excess interest on its physical assets. This broadens the company’s capital-raising abilities beyond the scope of physical assets.
Increased Appetite for Repayment: IP assets are central to a company’s business operations and securitizing them in favor of a loan ensures the borrower has an increased appetite to repay the loan since their IP rights now belong to another. This favors the lender as the borrowing company would love to keep its most treasured assets.
IP financing also allows companies to raise more capital than their fixed assets would typically secure. By combining fixed and intangible IP assets, a company can raise more money than previously envisaged.
IP assets also offer the benefit of being calculated on future projections, especially for patents or copyrights in movies and music. For instance, a producer could raise money for a new movie using his copyright in the yet-to-be-produced movie as collateral. The arising IP could be valued based on the performance of the producer’s previous projects and other metrics.
Can Intellectual Property Rights/Assets be used as security? Forms of IP Securitization Contracts
● IP-backed loans follow the pattern of regular loans, where you offer your assets as collateral to the bank. The bank values the assets and conducts due diligence to ensure your asset meets its liquidity needs and grants the loan. The bank retains the right to move against the collateralized IP should the borrower default in repaying the loan.
● Sales-leaseback: In a sale-leaseback arrangement, the ownership, or proprietary rights of the IPR change. The lender acquires the ownership of the IP, advancing a loan sum to the borrower. The borrower, in turn, pays a lease or licensing fee to use the IP. A Sales-leaseback agreement usually includes a repurchase option, allowing the borrower to re-acquire its IP after paying off the loan.
● Royalty securitization: A royalty securitization agreement works by assigning royalty payments originally accruing to you or your company to a lender as security for a loan. An example of this was David Bowie’s asset-backed bond in 1997, in which he granted the purchaser of the bonds the right to receive future royalty payments from 25 of Bowie’s pre-recorded albums until the principal loan amount and interest were repaid. Using this method, Bowie was able to raise $55 million[4].
Problems of Securitizing Loans With IP
● Valuation: Valuation is the major problem of securitizing loans with IP assets. Being intangible by nature[5], the valuation of IP assets can be challenging, especially for newly registered assets. There is also the problem of uncertainty, as IP assets may prove to be inadequate security when the company doesn’t get going or its assets lack liquidity. For IP assets to qualify as a security, they must be income-generating or show the potential to bring in money. However, not all IPRs, even when registered, can pass the liquidity test.
● Registration: Certain IP rights require registration before the owner can fully monetize or prevent their use. For instance, the Nigerian Trademarks Act 2004 prevents any person from instituting proceedings to prevent or recover damages for the infringement of an unregistered trademark[6]. For this reason, lenders are wary of accepting unregistered IP assets as security.
● Piracy and Infringement: Protection of IPR remains a huge problem, particularly in developing countries like Nigeria, where the awareness and enforcement of IP laws are low. Pirated copies of copyrighted works flood the market, and IP owners have to fight infringers of their rights to secure any chance of profiting from their own work. Lenders are unwilling to take on this responsibility as combating IP infringements requires much effort and capital.
● IP protection in Nigeria: As mentioned above, protecting IPRs in Nigeria is tedious. While several laws recognize the right of creators and inventors to exclusively reproduce and monetize their works, implementing these laws remains a major challenge. For instance, the now-repealed Copyright Act of 2004 made no provision for digital works[7]. There is also the problem of awareness, as large sections of the population need help understanding why IP laws exist or how they work. This makes it difficult for registered and unregistered IP owners to secure rewards for their innovation as provided by law.
The Way Forward: Cultivating An Environment For IP Financing
IP Financing presents global challenges and opportunities for businesses and lenders. As a result, IP Financing has remained a subject of several discussions, laws, and international policies worldwide. The United Nations Commission on International Trade Law (UNCITRAL) 2000 formed a Working Group to examine the problems of using personal property (intangible assets inclusive) as security in finance. This eventually led to a UNCITRAL Legislative Guide on Secured Transactions Supplement on Security Rights in Intellectual Property in 2011, recommending a uniform legal regime for financing generally, including IP-backed financing[8].
The recommendations of the Working Group adopted in the Legislative Guide and by the International Chamber of Commerce (ICC) include ensuring adequate IP systems to incentivize investment in innovation[9], and recognizing IP assets as a form of security, among others.
The following solutions should be implemented by relevant actors to create a viable environment for IP securitization in Nigeria.
● IP registration: Registering your IP is the first step to securing funding with them. IP rights cannot be granted over ideas, and these ideas only become assets when you take reasonable steps to register them as applicable. Patented creations and trademarks[10] are a great way to prove ownership to potential lenders and investors. The possibility of generating revenue from licensing and other commercialization strategies makes it appealing to lenders as IP constitutes a potential source of income that might be used to pay back the loan. Registration also allows you to bring actions against infringers and grants you exclusive rights, which you can subsequently use as security for loans.
● Insurance: Insuring your IP assets also shores up their valuations. You can insure your IP assets against loss, infringements, and risks like tangible assets. IP insurance firms also allow you to secure the valuations of your securitized IP assets.
● Awareness: One of the recommendations of the ICC on IP financing and rewarding innovation is ensuring the adequacy of IP systems. This can be achieved using legislation, awareness drives, and sensitization. The utilization of IP assets as security and protection of IP rights is relatively lower in Nigeria than in other parts of the world due to several factors, including illiteracy and low-income earning capacity. Regulatory bodies like the National Copyright Commission, the Trademarks Registry and Patent Offices, and other stakeholders in the IP industry can do more to raise awareness and knowledge of IP laws in the country[11].
● Legal recognition/framework of IP securitization: Legally recognizing IP assets as collateral will also go a long way in increasing the adoption of IP Financing in Nigeria. While the current IP framework recognizes the assignment and licensing of IPRs, more must be done to facilitate IP Financing. An example is the Kenyan Movable Property Security Rights Act of 2017 provides for the securitization of intellectual property assets[12], allowing startups and businesses to access funding using their intellectual property.
It is also important to mention S 222 of the Companies and Allied Matter Act (2020), which allows companies to create security interests in their intellectual property assets. Such interests, when created, must be registered with the Corporate Affairs Commission as a charge on the company's assets. The lender or security-taker should also ensure that registration of this security interest is done with the relevant IP body, such as the Nigerian Copyright Commission or the Trademarks Registry.
Although Nigeria also has a Secured Transactions in Movable Assets Act, this law is limited to the securitization of tangible assets. A ready model that could be adopted is the Singaporean IP Financing Scheme[13], a collaboration between the Singaporean Government and the Institute of Valuers and Appraisers (IVAS) to develop guidelines for the valuation of IP assets[14].
In India, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) also provides for IP financing, defining “property” to include trademark, copyright, and knowhow[15]. The Indian Design Act also recognizes the creation of mortgages, licenses, and other forms of interest in registered designs as a way to access funding[16].
● IP Exchanges: The creation and licensing of IP exchanges may also allow businesses to raise capital following the stock exchange modus operandi. IP exchanges list intellectual property assets in units, granting the IP owners to a vast pool of investors. Existing models include the Hong Kong Intellectual Property Exchange (HKIPEX) and Asia IP Exchange (AIPEX), which make IP valuations and offer verified assets to the public while charging commissions on trades.
Nigeria is estimated to have the highest number of startups in Africa[17], a creative force that led to about $2 billion in funding between 2015 and 2022[18], and the unicorn, Flutterwave. Also noteworthy is the fact that the Nigerian Startup Act (2022) mentions the importance of intellectual property rights to the growth and development of startups, and mandates its Secretariat to ensure seamless registration and protection of IPRs; and to assist startups in exploiting and commercializing their IPRs locally and internationally[19].
Against this background, there is no gainsaying that intellectual property is prevalent in the country. While the new Startup Act provides a tech fund to boost innovation and technological solutions, leveraging IP financing can provide an additional source of capital for startups and SMEs.
End Notes
[1] World Intellectual Property Organisation website - https://www.wipo.int/about-ip/en/ (Accessed March 13, 2023)
[3] Sam Adler, David Bowie $55 Million Haul: Using a Musician's Assets to Structure a Bond Offering, 13 ENT. L. & FIN. 1 (1997).
[4] IP Consult GmbH, Intellectual Property Financing - An Introduction (Wipo Magazine) 2008. Accessible at https://www.wipo.int/wipo_magazine/en/2008/05/article_0001.html (Last accessed 30th March 2023).
[5] It is this author’s position that the intangibility of an asset doesn’t necessarily translate into a lack of valuations or difficulty in ascribing value to it. However, unlike other intangible assets such as stocks, bonds, and shares (which may be collateralized), IP assets do not have a fixed value at creation or registration. A company, while registering, has a fixed number of shares at a predetermined value, while stocks and bonds are also valued at issuance.
[6] While relief may be sought on the common law principle of Passing Off, registration offers more conclusive proof of ownership and reduces the legal hurdles.
[7] S 29 of the Copyright Act 2023 now allows owners of copyrighted works to issue a notice to take down infringing copies of their to online media and service providers.
[8] The Legislative Guide suggests the promotion of credit accessibility to Intellectual Property owners at a lower cost to enhance the value of IPRs as securities.
[9] ICC launches principles to support innovation and meet global challenges (https://iccwbo.org/news-publications/news/icc-launches-principles-to-support-innovation-and-meet-global-challenges/) December 2015.
[10] Copyrights generally do not need to be registered before an author or producer can make claims in respect of this right. S 1(5) of the Nigerian Copyright Act 2023 states that Copyright shall not be subject to any formality, including registration, and (6) goes on to state that copyright protects any eligible work the moment it is created or mad.
[11] As an aside, it is my view that the basics of Intellectual Property Rights and protection be taught in schools as creativity transcends disciplines and we are currently in a knowledge based economy.
[12] S 1 defines acquisition security right as “a security right in a tangible asset or intellectual property, which secures the obligation to pay any unpaid portion…of credit extended to enable the grantor to acquire it…”. Section 14 further provides for independent security rights to be created with respect to tangible assets and the IP used in them.
[13] Unlocking IP Backed Financing in Singapore - https://www.wipo.int/wipo_magazine/en/2021/04/article_0001.html (Last accessed March 31, 2023)
[14] The scheme allows IP owners to conduct asset valuations by IVAS-licensed Valuers. The Danish IP Marketplace is another ready example, as it allowed SMEs to offer their IPRs for sale or licensing in exchange for funds. However, the Danish Trademark and Patent Office has shut down the IP Marketplace at the time of writing.
[15] Section 2(1)(t) of the SARFAESI Act.
[16] S 30 (2) of the Indian Design Act.
[17] Startups in Nigeria hit 5,200 - Punch Newspapers https://punchng.com/new-start-ups-in-nigeria-others-hit-5200-report/
[18] Nigerian Startups Raised Over $2bn between 2015 and 2022 - https://disrupt-africa.com/2022/10/14/nigerian-tech-startups-raised-over-2bn-between-2015-and-2022/
[19] S 31 (1) & (2) of the Nigerian Startup Act, 2022.
Originally published by Michael Popoola on LinkedIn
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