«Research commissioned by the Intellectual Property Office, and carried out by: Martin Brassell, Kelvin King This is an independent report ...»
As part of the ‘Global Hub for IP’ vision, the Intellectual Property Office of Singapore (IPOS) will also set up a new Centre of Excellence for IP valuation, and the latter will work with industry stakeholders on areas such as research on IP valuation methodologies and training and certification for IP valuation professionals. It will invest $40m to build up patent search and examination capabilities in technology areas considered to be strategically important to Singapore. Another $12m will be spent strengthening the IP Academy to be the central agency to orchestrate the delivery of education and training.
IP creation is seen as increasingly important as Singapore’s economy restructures towards innovation-driven growth. Earlier this year, during the Budget statement, the Productivity and Innovation Credit Scheme (PIC Scheme) has been enhanced to allow IP in-licensing costs incurred to qualify for PIC benefits.
PIC benefits are a grant or subsidy where businesses can make a claim for deduction in their tax returns by converting up to $100,000 of their total expenditure in six qualifying activities;
acquisition and leasing of IT, training, acquisition and in licensing of IP, registration of patents, trademarks, design and plant varieties, R&D and finally designs approved by Designs Singapore Council. The 2013 revision allows companies to claim 60% in cash payout or 400% tax deduction on their expenditure on any PIC qualifying activity.
The significance of this scheme is underlined by the findings of a recently-released report by DP Group titled The Fastest Growing 50 (FG50). In its report, DP Group announced that large corporate firms now dominate its list, with only four SMEs included, making it the lowest representation and the weakest showing since the report’s conception in 2002. It also marked a significant drop from 11 in 2012 and 17 in 2011. The report, which identifies companies with at least a 10% turnover growth annually for the last three years, also revealed that SMEs have 50 The role of intellectual property and intangible assets in facilitating business finance
To boost the overall ecosystem, financial institutions that undertake IP financing-related courses can also apply for support under the Financial Training Scheme administered by the Monetary Authority of Singapore (MAS).
Malaysia has been contemplating the introduction of specialist IP financing measures for several years. In November 2011, Malaysian Development Corporation (MDeC) chief operating officer Ng Wan Peng highlighted the lack of a collectively acceptable IP valuation framework which financial institutions can adhere to when processing applications for financial assistance. Ng indicated that hundreds of MSC Malaysia-status SMEs that possess IP rights such as patents, copyrights and trademarks were facing difficulties in getting financial assistance to commercialise
accepted as an asset that can be transacted and thus help increase our competitiveness as a nation.
Subsequently, in its 2013 budget, the Malaysian Government announced an allocation of RM 200m to Malaysian Debt Ventures Bhd (MDV) to develop an IP fund scheme.
MDV is set up to fund SME’s innovative companies, with a special emphasis on ICT, biotechnology and green technology, to expand their businesses by using intellectual property rights as collateral to obtain financing. The new IP fund scheme would provide a 2% interest rate subsidy and guarantee of 50% through Credit Guarantee Corp Malaysia Bhd.
RM19 million (around £4m) was also allocated within the 2013 Budget to the Intellectual Property Corporation of Malaysia (MyIPO) to create training programmes to local intellectual property evaluators as well as the creation of an intellectual property rights market platform.
The valuation training programme was launched on 7 March 2013, and a number of international valuation specialists (including Valuation Consulting Co Ltd) have been involved in its delivery to a number of locally based IP practitioners, bankers, accountants and VC companies over a series of cohorts.
The stated intention of this programme is to create an IP Valuation Model to allow IP to be valued and recognised by financial institutions as an asset that can be put up as collateral in obtaining financing. The IP Valuation Model is intended to serve as a guide for financial institutions as well as stakeholders in conducting valuations, or to be used as a basis to get a third party to undertake the valuation process. Latest reports suggest this is intended to be functional by January 2014.
South-east Asia: Korea
The Korean Government has experimented with numerous types of support to aid SMEs in both contentious and non-contentious situations. The former has included direct cost sharing initiatives between SMEs and Government regarding IP disputes and furthering the creation and sale of commercial IP insurance to cover the cost of potential infringement law suits. Under this scheme, the Government pays 70% or more of the premium for IP insurance.
In the non-contentious area, Korea Development Bank (KDB) and the Korean Intellectual Property Office (KIPO) are working together on initiatives to help SMEs and others. KIPO provides a valuation service for IP, and KDB either buys it or puts up guarantees for others to lend. Conversations indicate that over last few months, the emphasis seems to have turned from a fund to purchase IP (which is an expensive initiative) towards a policy of supporting guarantees. The real learning for KIPO and KDB in work so far has been in understanding the valuation process, which their experience suggests is more effectively leveraged by guarantees than by purchase.
The guarantee organisation, known as KODIT, provides 95% underwriting of IP valuation for lending and/or securitisation. It focuses on the value and the quality of patents, examining the 52 The role of intellectual property and intangible assets in facilitating business finance entire international portfolio/coverage of a company’s patents, rather than focusing on domestic aspects (as its intention is primarily to support international expansion). It is believed currently to be looking to bring in commercial banks to expand the process and to access more private finance In total, as reported by the Korean Herald in February 2013, the Government currently offers no less than 160 SME incentives, including tax benefits. Achieving shared growth between large and small companies has been a key policy goal of the Government for years, and this is expected to gain momentum under President Park Guen-hye, with large companies being encouraged to support SME growth via intervention and state funded panels.
In 2012 the Financial Times carried a report by Brooke Masters, Chief Regulation Correspondent, suggesting that several US banks want to tap the value of the IP holdings of their borrowers as a way of addressing their capital requirements under Basel III rules. Under the terms of many loans, banks have the rights to seize a borrower’s patents and trademarks as part of a foreclosure proceeding. However, even in the US (where domestic lending is not regulated by Basel III) these intangible assets cannot generally be counted towards a loan’s security for regulatory capital assets because they are considered too difficult to value.
Some banks faced with tougher safety rules (that began to take effect in January 2013) are exploring whether they can use these IP assets to reduce their estimates of expected losses in case of default, in turn reducing the risk weight of a loan and overall capital requirements. The banks are reported to be interested in deals in which an insurer agrees to buy a borrower’s intellectual property – anything from a mobile phone patent to a logo or recipe – for a fixed price in case of default. That price can then be counted against the expected losses, in the same way the expected proceeds from a credit default swap can be used today. One particular firm, MCAM, is already active in this space: their activities are summarised in chapter 7.
A Bill was recently introduced in Congress to provide a significant tax break to companies that manufacture patented goods in the US, along similar lines to those introduced elsewhere. The Manufacturing Innovation in America Act, HR 2605 was introduced on June 28th, 2013, lowering the Corporate Tax Rate from 35% to 10% on company’s profits that are derived from the sale of patented products (and foreign patents in certain circumstances).
similar invention or application” as a US patent that the taxpayer holds or exclusively licenses and provided that the taxpayer holds or exclusively licenses the foreign patent.
Other important non-policy initiatives in the US market include the IPXI rights exchange, described in more detail in chapter 7.
Canada In 1995, the Canadian parliament passed the Business Development Bank of Canada (BDC) Act leading to a new name and mission for the bank. The Act mandates BDC to promote entrepreneurship with a special focus on the needs of SMEs and to fill the market gaps and maximise financing alternatives for businesses by offering services that were complementary to those available from other financial institutions.
BDC is a federal crown corporation wholly owned by the Government of Canada. Its current mandate is to help create and develop Canadian businesses through financing, subordinate financing, venture capital and consulting services, with a focus on SMEs. As reported at www.
bdc.ca, with more than $1bn in current and planned investments, BDC focuses on innovative IT, health and energy/clean technology companies with high growth potential.
More recently, Canada’s Budget 2010 (Leading the Way on Jobs and Growth) announced a comprehensive review of support for research and development in order to optimise the contributions of the Government to innovation and related economic opportunities for business.
The Review’s report (Innovation Canada: A Call to Action) was released on October 17, 2011.
The report made a series of recommendations aimed at promoting business innovation. These included creating an industrial research and innovation council with a clear business innovation mandate, and simplifying the scientific research and experimental development programme by basing the tax credit for SMEs on labour-related costs. This was intended to enable funds to be redeployed from the tax credit to a more complete set of direct support initiatives to help SMEs grow into larger competitive firms. There are also measures to help high-growth innovative firms access the risk capital they need through the establishment of new funds where gaps exist.
South America: Brazil
In contrast to Singapore, Brazil has opted to use its long established Development Bank (BNEDS) to consider IP lending possibilities. In the past the same bank had been used to support capital and infrastructure projects. The remit of the bank has now been updated to reflect industrial development and diversification.
Similar to the government guarantee to be offered in Singapore, the Development Bank essentially underwrites IP business on behalf of the government, reflecting a portfolio of both historical and new IP business. The bank has a scoring system for management and IP capability, which is set in the context of market assessment, for lending on higher risks than would be normally accepted by commercial banks. This business is in its early stages and metrics on the performance of this new portfolio of lending are awaited.
54 The role of intellectual property and intangible assets in facilitating business finance
As explained in Chapter 1 above, it is not the function of this report to investigate the overall supply of finance to SMEs, as this has been more than adequately documented elsewhere.
However, to understand the potential role of IP and intangibles in facilitating better and wider access to finance, it is necessary to identify and investigate the underlying factors affecting supply, as well as the policy initiatives already aimed at addressing them, outlined in Chapter 2.
Leaving aside macro-economic factors (which have been exhaustively examined in other studies), the key aspects for immediate consideration are the reasons that have been given for businesses who wish to finance growth not being able to do so using debt instruments.
The supply of bank credit to SMEs has distinct characteristics compared to larger businesses. First, lending to SMEs is generally riskier as they are often young businesses, they often have less collateral available for security and they are less likely to have pricing power in their product markets. At a time when capital preservation is key, banks may be more reluctant to accept credit risk.
Second, SMEs are often more opaque than larger firms because they have lower reporting requirements, have less need for formal reporting structures and are subject to less outside monitoring by equity investors. This creates some important information issues.
Third, the collateral or assets used to secure loans are likely to be less liquid as they are more firm-specific and even location-specific and involve incomplete contracts.
These difficulties mean that the cost of bankruptcy (such as specific and not easily marketable assets) and loss on asset disposal may be greater for smaller than larger firms45.
Collateral is one of the key areas of investigation in the context of IP and finance. In this regard,
it is noteworthy that, in the words of the report:
Collateral requirements for term loans in 2011 and 2012 are higher than at any time since 2005…Higher sales and legal status as a limited company lead to collateral being required more frequently as does higher risk.
The study also found that:
While credit may be consistently tight for new loans, it appears to be increasingly tight for renewals… the rejection rate has increased particularly for low and average risk firms and not significantly for high risk firms46.