INTRODUCTION
Financing is the heart of innovation, research and development, and Intellectual Property[1] is an asset that can be purchased, alienated, or exchanged, and is driven by such innovative ideas of human creators which require funding. IP is an intangible asset that has a security interest ascribed to it and comes under the purview of property as per the SARFAESI Act of 2002.[2] There is also a lot of confusion about how to value intellectual property correctly. All three factors are major concerns regarding intellectual property, such as its divisibility, intangible value, and the limited amount of business transactions involving intellectual property.[3] Bowie Bonds triggered the new trend of securitization of IPRs which pioneered the intersection of IPRs and the realm of finance by selling asset-backed securities awarding the investors a share in the royalties of the music that were to be accrued in the future.[4] With these securities, Mr. Bowie was required to pay back his new creditors out of future profits, providing a 7.9% return on investment. A US insurance company, Prudential Financial, purchased them for $55 million (£38 million) and this occurred in the year 1997.[5] By securitizing intellectual property rights, companies can generate predictable royalties from the capitalization of intangible assets. Therefore, banks will be less likely to have to make loans and potential financial losses can be minimized.[6] Consequently, it helps an organization that strives for originality and innovation to diversify its interests. It is known as securitization when different financial assets are grouped and backed by new securities.[7] Copyright, trademark, and patent securitization have been a frequent practice throughout history for these reasons, and for others, the market for securitizing IP rights still expands rapidly today.
IPR AS A TRADEABLE ASSET
IPR is an intangible property, hence the notion surrounding the transferability and trade-related aspects as an asset is more or less restricted within contractual rights and enables the transaction of rights. IPR is a combination of intangible rights and contractual rights which are also recognized in various jurisdictions as property rights as well. IP is technically not a physical asset, but it can be used as collateral to get financing. Depending on the type of permission provided by the owner of the right, they may grant exclusive or non-exclusive licenses to the use of all or some of the protectable rights, or they may assign her work in its entirety, granting others full ownership of the IP rights of their work[8]. Owners of IP rights receive fixed royalty rates over an extended period of time, usually the whole life of the IP right in return for a license. By securitizing the licensee’s contractual right to royalties, as well as raising the owner’s money, this future cash flow allows the owner to securitize the licensee’s contractual right to royalties.[9] It is the value of an IP asset that represents the potential financial gains to its owner or authorized user in the future. A third party can directly exploit the IP by selling or licensing the product, or a third party can directly exploit the IP by including it within the product.[10] Intangible assets, including IP, are becoming a valuable source of finance for businesses to expand and innovate. In a loan deal, IP can be pledged as collateral as one way IP can be backed by funding. The secured creditor/lending institution may confiscate the IP if the debtor declares bankruptcy or defaults on the loan.[11] Defining IP value is notoriously difficult. Securitized intellectual property may have a higher value than previously estimated through traditional valuation methods.[12]
THE CONCEPT OF SECURITIZATION
Securitization involves pooling specific asset classes to repackage them into interest-bearing securities. As a result of the sale of the securities, the purchasers receive interest and principal payments. [13]Simply said, the process of securitization transfers the ownership of the assets like loans, and IPRs in this case from the owners to an SPV[14]. These assets like loans are in the form of an illiquid instrument that gets converted into a security that is marketable and tradeable. IPRs are not completely transferrable property but are a valuable asset that equips the holder to exploit the economic prerogatives, transfer happens through assignment, licensing, and leasing.[15] Through securitization, intangible assets like IPRs, and payment receivables which are illiquid in nature can be converted into liquid assets with the potential of marketability through the backing of tangible assets like land, properties, etc. Investing in loans and receivables portfolios may allow investors to modify interest rate and credit risk exposures based on their unique requirements which can be achieved by securitization.[16]
There are various participants in the process of securitization. It starts with the originator who creates an SPV to transfer the IP owned by the originator in exchange for funds. The funds raised through the process are contributed by the investors to the SPV. The SPV is a separate legal entity from the originator with the obligation to transfer the assets to the investor free from any risks associated with the business of the originator. IP rights entail revenue streams (royalties), which can then be turned into securities by establishing an SPV.
Depending on their legal form, SPVs can be businesses, trusts, partnerships, or trusts in the global securitization market.[17] Securitization is the only purpose of the SPV. Because the SPV does not have other assets beyond the royalty streams derived from its IP rights acquisitions and no other liabilities apart from its asset-backed securities, there is no significant risk. SPVs then transfer the cash flow to investors who are the buyers of asset-backed securities, less the amount paid to transaction services providers.[18] Continual royalty streams derived from IP rights are then passed on by the servicer to the SPV. There is another significant player in this process i.e. trustee who acts as a link between the SPV and the investor with the duty to secure payments for the investors.
There are credit rating agencies and credit-enhancing measures in place to protect investors from any deficiencies in royalty streams derived from IP underlying securities. This means that credit-enhancing techniques improve the likelihood of asset-backed securities being repaid on time and in full. An underwriter, or a group of underwriters, links the SPV to the capital market as the other player. An underwriter’s obligation is to guarantee the success of the offering by purchasing issued securities that are not acquired by the public. Patents and copyrights can generate revenue either by licensing underlying intellectual property or through sales of the items protected by those patents or copyrights. The special purpose vehicle will issue securities that are guaranteed by future revenue streams. As a result, individuals will receive payment from the underlying securities’ revenue streams after they purchase the freshly issued securities.[19]
CONCLUSION
Indeed a complex mechanism to secure financing for an invention, yet securitization is a notion that is still in development because neither SARFEASI nor any other IP regimes, such as the Patents Act of 1970 or the Copyrights Act of 1957, consider the developing need for recognizing securitization. Securitization transactions have relied on IPR since the mid-1990s with the Bowie Bonds. A major factor demonstrating the importance of IP rights in today’s economy is the increasing use of IP rights as a source of funding. Securitization allows businesses to fund their short-term operations while capitalizing on intellectual property rights that will generate a predictable royalty stream. But with the growing popularity of the securitization mechanism, there is a need to tailor a framework customized to the Indian IP regime entailing the intricacies of the Indian capital markets with avenues to cross-border investments.
Author(s) Name: Aathira Pillai (Maharashtra National Law University, Mumbai)
References:
[1] Hereinafter referred to as IPRs
[2] The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
[3] Intellectual Property Securities Corporation – IPSE, “Legal Aspects of IP Securitization” (LinkedIn) <https://www.linkedin.com/pulse/legal-aspects-ip-securitization-ipsecurities?trk=organization-update-content_share-article> accessed March 21, 2023
[4] “Considering Intellectual Property Securitisation” <http://www.buildingipvalue.com/05_NA/143_146.htm> accessed March 21, 2023
[5] Espiner T, “’Bowie Bonds’ – the Singer’s Financial Innovation” (BBC NewsJanuary 11, 2016) <https://www.bbc.com/news/business-35280945> accessed March 21, 2023
[6] “A Guide to Securitization of Intellectual Property Assets” <https://www.kashishworld.com/blog/a-guide-to-securitization-of-intellectual-property-assets/#:~:text=What%20is%20Securitization%20of%20Intellectual,can%20help%20finance%20business%20operations.> accessed March 21, 2023
[7] “Securing Financing with Intellectual Property Assets” (WIPO) <https://www.wipo.int/sme/en/securing-financing.html> accessed March 21, 2023
[8] SOLOMON DOV and BITTON MIRIAM, “Intellectual Property Securitization – Cardozo Aelj” <https://www.cardozoaelj.com/wp-content/uploads/2014/01/Solomon-Bitton-Final.pdf> accessed March 21, 2023
[9] ibid
[10] WIPO, “Valuing Intellectual Property Assets” Valuing IP Assets <https://www.wipo.int/sme/en/ip-valuation.html> accessed March 22, 2023
[11] “IP as Collateral” IIPRD <https://www.iiprd.com/ip-as-collateral/#:~:text=Pledging%20IP%20as%20collateral%20in,or%20defaults%20on%20the%20loan> accessed March 22, 2023
[12] “Securitisation of Intellectual Property Assets in the US Market” <https://ipo.org/wp-content/uploads/2013/04/Securitisation_of_IP_in_the_US.pdf> accessed March 22, 2023
[13] International Monetary Fund, “What Is Securitization?” <https://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf> accessed March 22, 2023
[14] Special Purpose Vehicle which is a legal entity
[15] Ambadipudi S, “Transfer of Intellectual Property – A Primer ”Transfer Of Intellectual Property – A Primer <https://www.mondaq.com/india/trademark/961790/transfer-of-intellectual-property—a-primer> accessed March 22, 2023
[16] “Introduction to Asset-Backed Securities” (CFA Institute) <https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/introduction-asset-backed-securities> accessed March 22, 2023
[17] Supranote 8
[18] Supranote 8
[19] “The Forgotten World of IP: How Can Intellectual Property Be Securitized and How It Should Be Regulated” <https://illinoisjltp.com/timelytech/the-forgotten-world-of-ip-how-can-intellectual-property-be-securitized-and-how-it-should-be-regulated/> accessed March 22, 2023
