Using IP to raise debt finance

November 2014

A recently issued report entitled 'The Trillion Dollar Tipping Point: Exploiting the Untapped Value in Patents' by Aistemos has pointed out that the value of IP rights lies largely untapped as a source of finance for businesses.

Misconceptions about IP rights

All forms of intellectual property are potentially capable of being used to raise finance. The difficulties in translating a portfolio of IP rights into a financing package, to help develop a business, tend to be practical and based upon misconceptions regarding the value of those rights. For example, misconceptions as to whether the rights can legally be used as security for finance and what happens with those rights in the hands of a lender if things go wrong with the financing.

Do IP rights have value?

Yes they do. IP rights are not just valuable, they are vital. Ask anyone – entrepreneur, banker or insolvency practitioner – about selling a business as a going concern and they will tell you that you need to be able to give an investor or purchaser paying full value, the right to use the names, brands, know-how and other IP related rights in order to proceed with any transaction. IP rights have a capital value in the sense that they can be bought and sold just like any other asset for a sum of money. They also have a value as an income producing asset because they can be licensed to third parties or otherwise exploited. These capital and income producing qualities of IP rights make them valuable and capable of being used as security for financing. The trick is finding someone who understands the value of these rights and who can turn that value into finance.

What can be offered to lenders?

Generally speaking, 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. Lenders will look to obtain a value for those IP assets against which they might lend; this is similar to a lender making a loan of say 70% of the value of an investment property. percentageThe lender will want some mechanism for being able to place a realistic value on the IP. This may mean obtaining valuations from experts in the relevant field, looking at comparable IP portfolio transactions, or assessing the value of any income streams derived from the borrower's licensing of the IP to third parties. Once a value has been settled, the borrower can offer the lender security over both the IP rights themselves and any income streams derived from them. These may comprise of security assignments, charges over IP rights and debts comprising income from them, transfer and license back arrangements, or some combination of the three.

Understanding the risks on default

If there is a default, the risk for the borrower is the same as in any other lending 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 "clean". Lenders will want to know that they will not become embroiled in expensive litigation if they need to enforce the security over the IP. For example, they will want to know the IP belongs to the borrower company and not its founders or employees, that the income stream generated from licences will continue to flow on a borrower insolvency and that the contracts generating that income can be sold, and that there is no risk of third parties claiming infringement of their own IP rights. By doing some preparatory work on these issues, such as obtaining reports from IP specialists on the status of the portfolio in different territories and any outstanding claims, borrowers can often persuade a lender that the assets fulfil the criteria necessary to make them viable security for debt finance.

See also "Can you bank on your IP?"

If you have any questions on this article or would like to propose a subject to be addressed by Synapse please contact us.

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"IP rights are not just valuable, they are vital."