Lending partly or wholly against intellectual property (IP) assets is a recent phenomenon even in developed countries. Collateralising commercial loans and bank financing by granting a security interest in IP is a growing practice, especially in the music business, Internet-based SMEs and in high technology sectors.
“Systemic innovation has been the core of Hainan’s efforts … we have achieved considerable progress,” said Sun Dahai, deputy secretary-general of the Communist Party of China Hainan Provincial Committee.
“Innovation in financing for intellectual property has been a major achievement in Hainan after the island province issued the country’s first IP asset securities late last year with plans to raise 470 million yuan ($69.5 million) of funds”.
“At present, most of the patents owned by small and medium-sized enterprises in Hainan were not put into efficient use, and companies were facing difficulties such as shortage of funds, lack of adequate financing channels and insufficient transformation of intangible assets into profits”.
Through the securitisation of intellectual property assets, the problem was efficiently solved, according to the local government. It is considered a brand-new model for the application of intellectual property rights and a new financing tool for small and medium-sized enterprises.
According to the World Intellectual Property Organisation WIPO securitisation normally refers to the pooling of different financial assets and the issuance of new securities backed by those assets. In principle, these assets can be any claims that have reasonably predictable cash flows, or even future receivables that are exclusive. Thus securitisation is possible for future royalty payments from licensing a patent, trademark or trade secret, or from musical compositions or recording rights of a musician. One of the most famous securitisations of recent years involved the royalty payments of a rock musician in the USA, namely, Mr. David Bowie.
At present, the markets for intellectual property asset-based securities are small, as the universe of buyers and sellers is limited. But if the recent proliferation of Intellectual Property Exchanges on the Internet is an indication, then it is only a matter of time before all concerned will develop greater interest and capacity to use IP assets for financing business start-ups and expansions. As more cash flows are generated by intellectual property, more opportunities will be created for securitisation.