«Research commissioned by the Intellectual Property Office, and carried out by: Martin Brassell, Kelvin King This is an independent report ...»
The audits also examined the number of trade marks owned by companies, and additional opportunities to apply for brand protection. The overall number of trade marks currently owned across the sample was 62. This was somewhat skewed by the existence of 22 trade marks registered by a single cleaning products company; however, as a result of the audit, no less than 14 additional unregistered trade marks were found. Overall, the number of potential trade marks discovered was 115, or an average of two per business (in fact there were only 16 of the 67 companies, or 24%, where no additional trade marking requirement was identified).
relatively inexpensive and straightforward form of IP protection was very considerable. In all, 81 registrable designs were identified, with only 20 companies, or 30%, not found to have the potential to register at least one72.
This data tends to support the argument that IP is of particular relevance to companies identified as having the potential for growth, and that raising the awareness of IP protection amongst UK firms would tend to increase company appetite for formal registration. It also supports one of the conclusions of the Hargreaves Review, that design should be a particular focus for IP policy.
Determining ownership levels of unregistered intangibles, including copyright assets, is by definition difficult. Whilst it is known from historical surveys that copyright is the type of IP right most widely held amongst businesses, breaking down that copyright ownership into its component parts over which a lender could obtain security (or an investor could gain confidence) is more problematic.
In addition, although guidance is given to providers on the desired scope of the IPO-sponsored audits, they do not use a prescribed template, with professional advisers able to use a report format they consider suitable for the needs of the company. Accordingly, unlike the structured data captured online and referred to in the next section, it is not possible to quantify precisely which non-registrable rights were found or how many different types were present.
However, most of the audit reports did make reference to the presence of previously unrecognised assets within the business, many of which will be subject to copyright protection. More than 75% of companies had at least one such asset, with two companies having as many as 10 items. In all, across the 67 businesses sampled, 157 such instances were found.
Many of the audits also made specific references to proprietary information and trade secrets which required protective measures to be in place. Across the sample, 21 such instances were found. There were also database rights identified in over half of cases – 34 out of 67 firms owned them – and 16 references were made to the presence of software code which was in some sense proprietary to the business.
72 It is likely that some of these companies may already have benefited from protection under unregistered UK or Community Design Right, but it is not possible to determine the probability that this is the case from the audit text.
120 The role of intellectual property and intangible assets in facilitating business finance
Registered vs. unregistered assets: audit tools
To get a clearer sense of the likely profile of intangible assets owned by companies, Inngot has conducted further research into the assets identified by IP owners using its online profiling tool.
For the purposes of this research, Inngot analysed a sample of approximately 400 profiles compiled by companies in two IP-rich sectors (environmental technology and software) and by universities participating in the ‘Pipeline’ community of licensable technologies, hosted by the Technology Strategy Board on its _connect online platform.
This latter data set covers the full range of technologies from across all sectors, including biotechnology and pharmaceutical, medical devices, electronics, communications and creative and media as well as software and environmental innovations. It therefore provides an idea of the range of assets being created across a range of technology-intensive activities, albeit at an early, typically pre-revenue stage.
Presence of registered rights
Universities are generally predisposed to file patents against their technologies in order to ensure that the potential to protect them is not undermined by subsequent publication. This was evident from the sample, with over 50% of university profiles featuring at least one registered right73. The presence of any registered rights in the environmental technology sector was higher, at 58%, and software lower, at 33%.
When looking at the type of rights present, significant differences emerge. 34% of profiles recorded by universities had a UK patent applied for or granted, and 45% of profiles included rights which were in the process of being registered in other territories (typically by the use of a PCT, or Patent Co-Operation Treaty, application). It is fairly common practice to use the UK patent application for the purposes of priority, and re-visit UK protection following EPO examination of the PCT application.
The position is reversed in respect of trade marks. Here, software businesses have the most registrations, with 27% of their profiles showing a registered UK trade mark and 6% having trade mark protection in other markets (usually a Community Trade Mark). Environmental technology companies have UK trade marks in 16% of cases and international marks in 6% of cases; for universities, the incidence of UK trade marks is just 2% and none had sought international trade mark protection. This reflects the fact that very few university technologies are recorded at the stage where they are actively being exploited in-market.
Presence of potentially registrable rights, not yet registered The overall use of design registration was very low across all three populations sampled (1%).
This is consistent with the broader use of registered designs across UK companies, which is known to be low. However, the profiling process also covers unregistered designs and unregistered trademarks, to identify cases where there may be potential for greater protection.
Ownership of copyright assets The Inngot classification system breaks down assets that attract copyright protection into a range of different headings to provide greater precision. All of the copyright assets have, by definition, to have been recorded in some way, and therefore go beyond ‘know-how’ and represent assets that a company or organisation can own and assign, and which can be charged. This asset class is particularly important because some of the earliest and most successful securitisations of IP (referenced in Chapter 7) relate to copyright assets.
For the three sample sectors, the key asset types (aside from ‘websites’) identified by users
broke down as follows:
Ownership of other non-registrable assets Inngot profiles are also used to record information about other value-producing assets that a company may own which are not registrable under statute, but which can be protected under 1 Note: this questions is intended to identify whether there are original designs that are not yet protected. They may or not be covered under unregistered design right protection.
2 Literary works include published articles, which are very important in the university sector. These often set out the nature of and/or applications for a discovery or invention and are therefore important assets.
3 To meet the definition for profiling purposes the software code must have been authored by the business: whilst all software companies clearly use software code, not all write their own.
122 The role of intellectual property and intangible assets in facilitating business finance
The high levels of ownership apparent for some of these asset types illustrates the importance of having a structured approach to the identification of IP and intangible assets when seeking to understand the level of substance underpinning a company’s operations.
Inngot also analysed a separate sample of c 400 profiles compiled by SMEs (i.e. with no university content) across a range of industries to ascertain the average frequency with which they identified the presence of non-registrable intangible assets when presented with suitable definitions and tools. These covered four categories: copyright assets, embedded product or service assets (such as trade secrets and proprietary processes), resource and relationship assets (such as contracts or licences with customers and suppliers) and approvals and endorsements (such as quality certification).
35 30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
High growth firms and intangible asset ownership Research into intangibles: Big Innovation Centre The Big Innovation Centre (BIC) has recently published the results of a new study into company intangible asset ownership using a dataset supplied by Experian74.
In order to be able to compare the propensity of companies to use equity and debt finance, the study is based on firms which have received equity finance between 1997 and 2012 (and are therefore known to have had access to both). The data supplied by Experian included number of employees, turnover and balance sheet data, enabling the size classification of companies to be conducted with greater confidence than the IPO’s IP matching exercise. In all 20,984 firms were included in the sample whose financing behaviour was followed over time, 90% of which were SMEs. The BIC research then segmented these into high growth and non-high growth companies.
The available balance sheet data included values attributed to intangible assets. It is important to stress that these figures should not be conflated with the presence of patents, trade marks, registered designs and similar, as the sums shown will generally relate to capitalised R&D expenditure which a company has considered prudent to write down or amortise over a period of time. Insofar as any of this expenditure has involved or led to the creation of IP, the accounts will only reflect the cost of obtaining them rather than the value they represent; the main exception being where assets have been acquired outright from another company, usually as a result of merger/acquisition activity. Any IP licensing activity would be shown in the company’s profit and loss account.
BIC’s analysis of the data showed that the level of intangible assets owned by businesses generally was increasing. Within the sample, high growth firms had 74% more intangible assets on their balance sheet than non-high growth firms. It also concluded that where firms were funded by equity, each £1m raised led to an investment of £499,000 in intangible assets amongst high growth firms, compared with £195,000 across those who were not high growth.
The report contains a logistic regression run to estimate the impact of intangible assets on the
probability of a firm being high growth, controlled for firm size, age and its industry:
Firms with higher levels of intangible assets as a proportion of total assets are more likely to be high growth firms; specifically, increasing the intangible asset ratio by 1% increases the probability of being high growth by 3.6%. This effect is much larger for firms in some sectors – for firms in the Business Services sector an increase in the intangible asset ratio increases the probability of being high growth by 9.8%. This suggests that a relationship exists between the intangible asset ratio and whether a firm is high growth75.
74 Disrupted Innovation: Financing small innovative firms in the UK, Hiba Sameen and Gareth Quested, Big Innovation Centre, August 2013 75 Ibid, p31 124 The role of intellectual property and intangible assets in facilitating business finance
As explained above, the data captured in the BIC research relates to expenditure on innovation (primarily in terms of research and development) rather than actual asset ownership, which is the main topic of this report. However, it highlights an important point about the availability of relevant data for lending and investment purposes.
The issue relates to the lack of a ‘clear line of sight’ through to the assets that actually exist, over which a lender could obtain appropriate controls.
The difficulty currently faced by banks is that the data they receive on the presence of intangible assets is frequently limited to the numbers shown on a company’s balance sheet. Since the presence or absence of intangibles on SME balance sheets is generally a matter of accounting and management preference, and simply records expenditure, it is understandable and reasonable for a credit department to treat this figure differently from tangible assets; the latter will at least relate to an identifiable ‘thing’ that a company has purchased which may have some residual value.
The unfortunate consequence of this accounting treatment (investigated more fully in Chapter
9) is that the historical disregard of on-balance sheet intangibles not only weakens the balance sheet under analysis (thereby exacerbating the problem of obtaining comfort on a company’s substance); it also obscures the financier’s view of the vital assets which have been created.
Accordingly, rather than ignoring the figure for intangibles shown, it needs to act as a prompt to investigate which assets have been generated as a result of the investment in intangibles, and what their relationship is to value generation.
This point is picked up on page 21 of the BIC report: