Monetising Your Intellectual Property

Sri Richgopinath examines the Malaysian Government’s proposals to introduce the securitisation of IP 

The conventional method of monetising intellectual property (IP) is through its exploitation either by way of creating licenses to use the IP for a fee or selling the rights in the IP for a value. Given the extent of revenue that may be derived from exploiting an IP, many corporations spend millions of Ringgit annually in research and development of IP with expectations of reaping the benefits from future commercialisation and exploitation of the IP. Therefore, there is now a growing consensus that intangible assets such as IP may be more valuable as compared to tangible assets, such as land and building.

Traditionally, corporations use their tangible assets as security to obtain financing from financial institutions. The Prime Minister announced at the 2013 Budget Speech delivered on 28 September 2012 that Efforts will also be undertaken to enable SMEs to further expand their businesses by using intellectual property rights (IPR) as a collateral to obtain financing. For this, a valuation model will be created to enable IPR to be valued and commercialised in the market as well as utilised as collateral to obtain financing from financial institutions.” Since then, there has been a growing momentum in the discussions to amend the existing IP related legislation to recognize securitisation of IP.

 

INDUSTRIAL DESIGNS

The first piece of legislation to introduce amendments that enable IP to be used as collateral is the Industrial Designs (Amendment) Act 2013 which will come into operation on 1 July 2013. The amendments to Sections 29 and 30 of the Industrial Designs Act 1996 provide that a registered industrial design may be the subject of a security interest in the same way as other personal or movable property. It also provides for such an interest to be recorded in the Register of Industrial Designs.

Steps have also been taken by the Government to review several other IP-related Acts and amendments are likely to follow suit.

 

PATENTS

The Intellectual Property Corporation of Malaysia (MyIPO), in its Consultation Paper of June 2012 on the Proposed Amendments to the Patents Act 1983, stated as follows:

“Intellectual Property is a personal property and it can be subject to a charge, mortgage etc. Realising the potential of IP as a financial instrument, MyIPO proposed to give this due recognition for future dealings in financial transaction. The amendment to the Patents Act introduced the concept of mortgage and this is reflected in Section 3 and Section 36(1) of the Act.

A mortgage or charge security need not be registered to be valid, but there are advantages from registration, which has been provided for, in the proposed amendments to the Patents Act. It is recommended that the ambit of registration of a securitized IP be left broad. That is to say recognition must be had to the concept of ‘mortgage as well as charge and in addition to that ‘liens, pledges and hypothecations. This would essentially reflect as broadly as possible and in as flexible manner as possible the various manner in which securitization may be contemplated by people in commerce and recognized in law, which in essence is the objective of the move for IP monetization.”

 

TRADE MARKS

MyIPO also published another Consultation Paper of July 2012 on the Proposed Amendments to the Trade Marks Act 1976 where the following was stated:

“Intellectual Property is recognized as a personal property and it can be subject to a charge, mortgage etc. Realising the potential of IP as a financial instrument, MyIPO proposed to give this due recognition for future dealings in financial transaction. As a regulatory and registration body, MyIPO plays a role in IP securitization by providing a recordal system of registrable transactions. MyIPO has identified the following transactions as registrable transactions which can be recorded or registered with the Registrar:

(a) Grant of a license
(b) An assignment of a registered trade mark or any right in it
(c) Grant of any security interest (whether fixed or floating) over a registered trade mark or any right in or under it
(d) Making of personal representative of an assent in relation to a registered trade mark or any right in or under it
(e) An order of the court or other competent authority transferring a registered trade mark or any right in or under it.”

 

OTHER INITIATIVES

In line with the Prime Minister’s proposal in his Budget 2013 speech, an Intellectual Property Financing Fund scheme amounting to RM200 million will be established. The scheme will be offered through Malaysian Debt Ventures Berhad where the Government will provide a 2% interest rate subsidy and guarantee of 50% through Credit Guarantee Corporation Malaysia Berhad.

The Prime Minister has also stated that the Government will allocate RM19 million under Budget 2013 to MyIPO to conduct training programmes for local IP evaluators as well as to create a market platform for IP-rights.

The Multimedia Development Corporation (MDeC) announced on 27 April 2012 that it has finalized a study on IP Valuation Model which may assist financial institutions on methodology to be adopted in valuing IP. This study was carried out by MDeC in close collaboration with MyIPO.

Therefore, it appears that once the amendments and proposed amendments come into operation and the policies are implemented, corporations can use their IP as collateral to obtain financing from financial institutions.

 

ASSET-BACKED SECURITIES

One interesting aspect of IP securitisation which has been adopted in other jurisdictions is the use of IP as collateral for the issuance of asset-backed securities. It may be possible that once financial institutions in Malaysia recognize the potential of IP as a highly valuable intangible asset, the market for IP securitisation in Malaysia may extend to the creation of such IP asset-backed securities.

The Bowie Bonds were one of the earliest high profile IP asset-backed securities to be issued. In 1997, David Bowie through his investment banker, David Pullman, issued 10-year asset-backed bonds on the basis of future royalties from 25 of David Bowie’s albums (about 287 songs). The transaction generated US$55 million which David Bowie obtained upfront in exchange of him forfeiting 10 years’ worth of royalties.

Another well-known IP asset-backed securities transaction was by Dunkin’ Brands which owns Dunkin’ Donuts and Baskin-Robbins franchises. In 2006, Dunkin’ Brands raised US$ 1.7 billion by selling bonds backed by future royalties that it will receive from its franchisees.

In Malaysia, the Securities Commission already has in place Guidelines On The Offering Of Asset-Backed Securities (ABS Guidelines) since 2004. The ABS Guidelines regulate the issuance and offer for subscription or purchase of asset-backed securities. Paragraph 4.01 of the ABS Guidelines sets out the criteria that must be fulfilled for an asset to be used as security in a securitisation transaction. These criteria include the following:

(1) The assets must generate cash flow;
(2) The originator must have a valid and enforceable interest in the assets and in the cash flows of the assets prior to any securitisation transaction;
(3) There are no impediments (contractual or otherwise) that prevent the effective transfer of the assets or the rights in relation to such assets from the originator to a SPV. For example, any regulatory or contractual consent which is required to effect the transfer of such assets from the originator to a SPV must be obtained;
(4) No trust or third party’s interest appears to exist in competition with an originator’s interest over the assets; and
(5) Where the interest of an originator in the assets is as a chargee, the charge must have been created more than six months before the transfer.

Therefore, it appears that it may be possible for an IP to be used as the underlying asset for an asset-backed securitisation transaction if all relevant criteria in the ABS Guidelines are fulfilled. However, this will be subject to the Securities Commission’s recognition that such transaction is possible. At the moment, it is not known whether such a transaction will be permitted by the Securities Commission and even if permitted, whether separate or enhanced guidelines will be issued for IP asset-backed securities.

 

CONCLUSION

It is not known at this juncture whether steps are being taken to amend the Copyright Act 1987 to enable copyright in works to be used as security.

The Government’s concerted efforts through MyIPO and other agencies in acknowledging the potential of IP as assets that are capable of being used as security are much welcomed. In an age where a corporation’s intangible assets may be worth more than its tangible assets, it is timely for IP securitisation to be introduced in Malaysia.

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