Articles

Trends in Intellectual Property: The Securitization of IP Assets

Date: November 18, 2014

The current economic market of low interest rates has sparked a revival of securitization of risky assets.  Traditionally, lenders secure loans with tangible assets; however, intellectual property assets are becoming increasingly popular with both lenders and borrowers as a means to close a deal.

Using intellectual property assets as collateral is not a novel concept, as Thomas Edison used his patent on the incandescent electric light bulb as collateral to acquire financing to start General Electric. Indeed, a firm’s IP can be its most valuable asset, and one of the best ways to take advantage of this asset’s value and monetize it to the company’s benefit is through securitization.

While there are positive signs for this trend, securitizing IP assets is not without its complexities. Understanding the value and structural issues of an IP asset is very important in properly using the asset to secure financing. For instance, patents vary in scope and commercial significance, and valuation of patents is fact-specific thereby making the valuation process costly. A patent may also have significant value to a limited group of people, thereby reducing the liquidity of the asset, which in turn can have an effect on its overall value as collateral. In addition, patents are not permanent property rights and can be invalidated or simply expire. To avoid this, lenders often require that a company’s patents be pooled in order to mitigate some of these risks.

Those seeking to use IP assets as collateral generally do so in two ways. A lender can have the IP asset assigned directly to them, thereby owning the collateral until the loan is repaid. While this method appears to be simple, there are several issues that must be addressed. Direct ownership of an IP asset requires the owner to manage the asset. The owner must decide whether or not to license the IP and whether to pursue infringement claims, and must pay certain maintenance fees to maintain the IP. As a result, the more common practice in securitization is to assign a security interest to the IP itself. This will alleviate some of the concerns with an assignment, and leaves management of the asset with the party who fully understands it and is most likely leveraging it.

As more lenders and investors gain experience in the valuation process and securitization procedures, the use of IP assets as collateral will continue to rise.  Ideally, this growing trend will garner an interest to use IP assets for funding start-ups and expansion, and hopefully will create other opportunities for financing. 

Questions about intellectual property and your business? Contact the attorneys at Whiteford Taylor Preston.