«Research commissioned by the Intellectual Property Office, and carried out by: Martin Brassell, Kelvin King This is an independent report ...»
The more practical obstacle lies in the difficulty of identifying prospective purchasers. The marketing strategy for IP is less obvious than it is for tangible fixed assets, and while no market functions perfectly, there is clearly room for more and better solutions to intangible asset disposal, especially where this needs to happen independently of the business. As things stand currently, demand for assets may never get properly tested.
The fact that IP can have significant value in this context is not in doubt, and the briefest study of global licensing activity reveals it to be an immensely valuable, highly tradable and very portable asset class. There have also been highly successful securitisations of IP which have raised very substantial sums for the companies in question, and larger multinational companies in particular have become highly adept at using intangibles to create tax-efficient structures.
Global developments, chiefly in the US, on the aggregation of patents for offensive and defensive purposes serve to reinforce the point that these assets are central to value creation. There are active auction and brokerage markets for IP which are starting to be replicated here.
There is also clearly a role for insurers. At present the IP insurance market in the UK is very niche; whilst existing policies can provide good value, it is arguably locked in a cycle where the incentive for negative selection are very great (i.e. companies do not buy policies unless they are likely to claim). Since all insurance policies can only be affordable if there is a spread of risk, wider conscious financing of IP and intangibles has the potential to be widely supported by insurers – provided it is clear what the assets are and the risks they pose.
Equity investors and providers of venture debt generally obtain a degree of control over IP and intangibles through covenants and/or voting rights, and have the on-going advantage of having paid closer attention to them during initial due diligence. However, lenders are not in the same
position. Kerrigan, quoted in Chapter 8, summarises the situation as follows:
Taking security over IP requires more than the execution of a security document. The IP must be identified, valued and subjected to due diligence. The lender and the borrower must agree on the practical steps required to create, register and maintain security interests in relation to the particular IP. The lender must maintain good information and an informed strategy in relation to any enforcement it may be required to pursue144.
144 Ibid 214 The role of intellectual property and intangible assets in facilitating business finance At present, this is simply not happening in the majority of cases. Lenders regard IP as being essentially the company’s problem or responsibility; they generally use a floating charge because they do not actually know what the assets are. This leaves them highly exposed to the risk of losing priority over valuable IP assets, especially because companies that get into difficulties may do (or omit to do) many things which will undermine this value.
This fact alone, which is crystal clear from the statistical analysis conducted for this report, should be sufficient to motivate lenders to do more to identify and assess the IP (particularly, but by no means exclusively, registered IP) in the companies they are financing. However, there is no difficulty in standardising good practice in this regard, and creating resources to facilitate this emerges as a priority. Drawing up a series of templates for charging documents and debentures looks likely to be a helpful first step.
Two further points are apparent from a study of the legal and regulatory environment:
It is important to note, however, that the key purpose of accounting is to record and represent transactions that have happened. In this regard the steps taken to incorporate IP and intangibles, at a fairly granular level of detail, within post-acquisition accounting do make an important contribution to the discussion on IP value, although these do not normally affect SMEs.
The UK vs. international context The negative conclusion of this report is that at present, IP and intangibles are not being properly harnessed to drive growth, and that this failure amounts to a real and important disconnect between banking practice and regulation and public policy. How can the assets companies create and own, whose commercial development is central to a successful knowledge-based economy, be valuable in one context and seemingly valueless in another? From a bank viewpoint, how can lending truly support growth when it cannot benefit properly from the valuable assets growing and maturing companies have to offer?
The positive conclusion of this report is that measures and structures do already exist which could address these issues. However, they need to be addressed without delay, as there are plenty of examples from faster growing economies to demonstrate how other countries have developed a good understanding of this issue.
Two overarching principles
The first principle concerns the fundamental ‘information asymmetry’ which currently exists. In the case of IP and intangibles, the problem is more profound than asymmetry, because such a term presupposes that the business seeking funding knows more than the financier.
The issue that must be tackled is that in many cases, SMEs is not much better placed to understand and communicate the IP and intangibles they own than the lender or investor. This makes it harder than it should be for financiers to obtain the information they need to make an informed decision about whether any IP is valuable or fundable. It amounts to a fairly profound degree of IP ‘illiteracy’.
The conclusion of this report is that a resource toolkit must be put in place, tailored to the funding context, aimed at helping SMEs, lenders and other financiers to make more effective use of the value IP and intangibles represent within businesses.
A toolkit is not much use if it is not used. Accordingly, it must be accompanied by steps to secure financier commitment to trials, appropriate training/familiarisation, and measures to monitor the economic effectiveness of the support provided. Given the level of interest in the subject matter this report has stimulated, such commitments should not be too difficult to obtain. They are, however, vital to ensure that the toolkit is fit for purpose and that further measures to assist in value realisation are identified.
The second principle is that the programme must build on existing initiatives. The change needed to help companies leverage the investments they make in IP and intangibles can come by inserting the necessary components into existing practices, rather than trying to create completely new financing paradigms.
To take one example: the Enterprise Finance Guarantee already seeks to tackle one of the fundamental problems facing IP-rich businesses, which is the absence of tangible security. The scheme’s approach of augmenting existing established practices by addressing the risk element 216 The role of intellectual property and intangible assets in facilitating business finance is logical and sensible: it simply needs to recognise and harness the assets that such businesses are in a position to bring to the table, for the benefit of both lenders and borrowers.
There are other examples. The Business Finance Partnership is already providing SME support through existing channels; funds which specialise in hard-to-back business sectors such as software should be encouraged to apply. Similarly, there are already some helpful tax incentives
to encourage investment in early stage companies, such as the Enterprise Investment Scheme:
a toolkit could work alongside those working to create deal flow, to ensure that due diligence procedures are properly conducted. There is also the small matter of the Patent Box, the greatest benefit of which may prove to be that it provides companies (and advisors – and Government!) with a very good reason to think more seriously about IP and its visible value.
that may be called an intangible on their balance sheet; this generally only shows a sunk cost.
3. Due diligence guidelines can help to control costs IP and intangibles that are worth something are, by definition, unique. Because the assets are not commodities, checks will be needed to create confidence that the ownership and quality of the IP and intangibles are understood, that they contribute to cashflow (particularly in the case of debt finance), and that their maturity is in line with what it would be reasonable to expect, given the development stage of the business.
These checks are unfamiliar to most lenders: investors are more practised at them, but it is clear that they too face challenges in obtaining and assessing appropriate data.
Guidelines will involve providing templates, training and/or access to professional advice at a cost lending margins can support, within a turnaround time that meets business requirements.
4. More effective charges should be part of the lending package Once IP and intangibles are captured, assessed and verified, it becomes possible to create a proper and meaningful interest over them, beyond a simple floating charge. This is not happening at present; there is no real notice of these charges, leaving many lenders exposed to unnecessary risk.
Proper controls are an essential precondition if lenders are to place any reliance on the value inherent in IP and intangibles – which in turn benefits the borrower.
Legal templates and the resource toolkit will help lenders to achieve this at modest cost, firstly by providing appropriate wording for the instruments, and secondly by providing guidance on the procedures which must be followed when recording them to ensure their effectiveness.
5. IP markets and IP financing could be facilitated through infrastructure improvements The development most likely to transform IP and intangibles as an asset class is the emergence of more transparent and accessible marketplaces where they can be traded.
This is a domain where services must stand or fall on their commercial merits; however, the available infrastructure needs to support rather than impede their establishment. A parallel lies in the way value has been added, cost reduced and enforcement activity enhanced across a range of motoring-related services by facilitating access to data held by the Driver and Vehicle Licensing Agency.
As IP and intangibles become more clearly identified and are more freely licensed, bought and sold (together with or separate to the business), services available to register and track financial interests will need to be improved.
This is not a job for government - but solutions will require the co-operation of official registries and the establishment of administrative protocols.
218 The role of intellectual property and intangible assets in facilitating business finance
The authors would also like to express their thanks to the many contributors who provided their expert insights for this report, but were not able to do so under attribution.
220 The role of intellectual property and intangible assets in facilitating business finance
Self-managed learning resources can be found on the Intellectual Property Office site www.ipo.
gov.uk, which is an ideal starting point for questions. The World Intellectual Property Organization has a global perspective, and interesting case studies at www.wipo.org. Resources for the creative industries, provided by Own-it www.own-it.org include IP short courses.
Teachers and academics have long been keen to know what their intellectual property rights are in respect of learning and teaching materials created in the course of their work, or in respect of journal articles or other publications. Universities UK www.universitiesuk.ac.uk/ and the Higher Education Academy www.heacademy.ac.uk/ have addressed these issues, and make helpful information available.
All involved in projects will want to know more about ownership and exploitation of IP created and used in the course of their research. University technology transfer organisations provide IP education opportunities, including the Association for University Research and Industry Links www.auril.org.uk. Much can be learnt from the recently published http://www.ipo.gov.uk/ ipasset-management.pdf about how IPR is managed in institutions.
Employers and employees needing to learn more about the intricacies of IP ownership and how to make the most of intellectual property will find the Intellectual Property Office site helpful.
Those considering a career advising others how to protect, manage and exploit their intellectual property can find IP education opportunities at many universities or through the intellectual property professional bodies, some of which are detailed below.
The universities of Bournemouth, Brunel, Manchester, Nottingham, Nottingham Trent and Queen Mary UL all have IP research centres and post graduate programmes accredited by the Chartered Institute of Patent Attorneys www.cipa.org.uk and Institute of Trade Mark Attorneys www.itma.org.uk. Many other universities offer Intellectual Property Rights studies as part of LLM, MSc, MBA and PhD programmes.
The Intellectual Property Regulation Board www.ipreg.org.uk regulates the IP professions, and is currently consulting on a revised qualification regime for patent attorney and trade mark attorney litigators to facilitate the grant of relevant rights to registered patent and trade mark attorneys. The Licensing Executives Society www.lesi.org offers IP education opportunities for professionals engaged in IP exploitation.
The European Patent Office Academy ‘Patent Kit’ provides a resource for teaching students about patents www.epo.org/learning-events/materials/kit.html. The UK IPO ‘Think Kit’ has online case study resources appropriate for higher school and undergraduate learners http:// www.ipo.gov.uk/whyuse/education/education-thinkkit.htm.
The European Intellectual Property Teachers Network www.eiptn.org provides a forum for sharing and developing IP education ideas amongst university teachers who deliver IPR programmes across disciplines and faculties. A resource sponsored by the Higher Education Academy Engineering and Law subject centres http://www.engsc.ac.uk/resources/intellectualproperty-rights contains diverse materials to help introduce IP education in the non-law curriculum.
In relation to the pioneering field of Intellectual Property Finance, the publicly available information is unfortunately still quite limited. However, those who are interested in this burgeoning multidisciplinary field (researchers, inventors, academics, STEM professionals, accountants, bankers, financiers, investors, IP professionals, lawyers) should start with articles published in the World Intellectual Property Organization’s (WIPO) Magazine entitled IP Finance: An Introduction (November 2008) and IP Financing: the Ten Commandments (September 2008) at http://www.
WIPO also provides more detailed information concerning IP and financing in its ‘IP for Business’ webpages (http://www.wipo.int/sme/en/managing_ip.html). In terms of IP Finance research, the first European research centre focused on IP Economics and Finance is the IP Finance Institute (IPFI), a non-profit organization based in Torino, Italy (http://www.ipfinance-institute.
com). There is no equivalent institute in the UK.
For those wishing to obtain higher educational qualifications in law and finance in the UK, the Said Business School at Oxford University and Queen Mary, University of London offer postgraduate degree programmes as does Germany’s Institute of Law and Finance (ILF), a graduate school of Goethe University in Frankfurt-Am-Main (www.ilf-frankfurt.de). Queen Mary and Leeds University both offer Master of Laws degrees in banking and finance. As yet, there is not believed to be a post-graduate qualification available anywhere in the world that specifically focuses on the subject of IP finance.
The IPAN Education Group offers the above suggestions as a starting point. Numerous opportunities to acquire IP education have, for reasons of being concise, been omitted. IPAN knows also that intellectual property rights awareness, amongst SMEs especially, could be improved. IPAN is working to encourage professional bodies to include IP education in the accreditation requirements for new members. IPAN feels UK plc’s fortunes would improve if graduates left university knowing something about intellectual property rights.
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