Towards securitisation of intellectual property rights

Nwora Ike Obiora

Intellectual Property (IP) refers to conceptions of the mind, such as inventions, literary and artistic works, designs and symbols, names and images used in commerce. IP Rights are property rights in something intangible that protect innovations and reward ingenious activity. IP Rights allows people to own their inventiveness and innovations in the same way that they can own physical property and it is indeed the most valued asset owned by a company.

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Traditional conception of property did not admit of the existence of intangible property. Accordingly, IP rights were largely unrecognized. This was especially so in the commerce and trade industry where investors were anxious for tangible property as collateral for loan grants. However, as the economic base of society shifted, other types of property acquired value, and debtors and creditors began to recognize the worth of IP rights as collateral for commercial transactions. That notwithstanding, the possibility of employing IP rights as security for commerce raises intricate issues of legal concern. This article is an attempt towards examining the employability of intellectual property rights as security for commercial transactions in Nigeria; especially in a developing economy where the relevance and importance of intellectual property rights are almost relegated to the background.

The request for loans for funding of companies is as pronounced as ever. Property that a mortgagor has covenanted as security in a transaction is often referred to as security. Up until now, commercial lending was reserved only for companies that had substantial tangible assets and notable accounts receivable. Mortgagors conventionally pledged tangible assets and accounts receivable to secure bank loans, and intellectual property was a mere reflection in the creditor’s credit exploration.

However, as the fiscal base of the society shifted, other forms of property obtained value, and mortgagors and mortgagees began to recognize the worth ofIP as collateral. Ever since Thomas Edison first used his patent on the incandescent electric light bulb as security to secure finance to start his company, the General Electric Company, IP began to gain the deserved recognition in the financial market as security.

IP rights are assets that can be used as security for financing one’s enterprise over a secured transaction. Using IP as collateral is an evolving business alternative that may offer a financing prospect for companies with valued IP assets looking for other sources of capital. Companies, large and small, may possibly need additional capital for a variety of purposes. Startup and smaller companies may need capital for such reasons as starting up or expanding operations, sustaining or increasing their research and development spending, or for complementary acquisitions.

Today, mortgagors can give creditors security interests in intangible properties as well as physical assets. Intangible assets include IP rights, such as patents, trademarks and copyrights, and as a country’s economy develops progressively, IP rights are likely to become more and more valuable security. The economies with low interest rates have sparked a revival of securitization of risky assets.

Traditionally, creditors secure loans with tangible assets; however, IP assets are becoming increasingly popular with both creditors and debtors now seeing them as veritable leverage to closing a deal.

Truly, a person or company’s IP can be its most valuable asset, and one of the best means to take advantage of this asset’s value and monetize it to the company’s benefit is through securitization.

Asset securitization is the practice of converting an asset or a stream of cash flows into marketable security. It is well known in the finance industry but relatively new to the world of IP. Moving into the future, securing funding using IP will be more important as the focus of corporations continues to move towards developing IP.

Though it may sound commercially unviable, risky and quite unimaginable to use IP as a source of security especially in Nigeria where little or no regard is paid to IP rights, yet it is a possibility.It is no doubt that we all enjoy the goodness of Facebook and other social media sites. What we enjoy today is nothing but the result of one man’s innovative thought. Facebook’s market capitalization is currently more than $460 billion as at April 2018. In the same light, there are so many software developers with mind blowing innovations like that of Facebook yet lacking in funds to bring their innovation to the limelight.

In business world of today, the IP collection of many businesses forms a vital part of the company’s assets. As such, banks and other financial institutions advancing money to companies (in Western Europe, the U.S.A., Canada and other developed countries) are increasingly taking security over debtors’ IP portfolios as part of a security package. Particularly in transactions where the IP held by the debtor is of significant commercial value. Careful consideration is required as to how security interests are to be created.

Creditors valuing a debtor’s IP portfolio (in the context of taking security) have tended to focus on registered IP. The trademark, patent, and registered design registers administrated by the Patent Office provide readily accessible information on registered IP, enabling creditors to easily identify not only the rights in question but also to verify information such as the term and ownership of such rights. These registers also contain information as regards any encumbrance theses IP rights labours under.

Furthermore, the Patent Office operates a priority recording system whereby the record of a creditor’s security interest over a particular right means that third parties later acquiring an interest in that right (whether ownership, a license, or a security interest) will take subject to the creditor’s earlier registered rights. Consequently, while a debtor may not have any portfolio of registered IP, creditors may find that the debtor’s unregistered IP is of substantial commercial value. The identification of registered and unregistered IP will be a primary factor in deciding how security interests are to be created.

In the bid to secure the interest of the creditor in securitization of IP rights, the following step is to be taken by the creditor, and they are: Due diligence, Taking security over the IP, Post-transaction formalities

While investors generally acknowledge the importance of IP to a company’s success, they are often not willing to use it as collateral for providing finance. Reasons for this include the intangible nature of IP and difficulty of placing a value on it.

The power of commerce is particularly evident in the area of secured credit, where loans and other extensions of credit can have a profound impact on the growth of business, and therefore the growth of economies. Considering the value of IP and its availability, it is our view that IP should be encouraged as a form of security and our laws should be reformed toward this global trend among developed nations.

Though IP may be difficult to use as collateral for securing debt, especially in Nigeria where piracy is at its peak and regard for intellectual property is at its lowest ebb, it indeed remains a possible, viable and unexplored form of security.

READ ALSO: NCC renews onslaught against pirates


Obiora, a Lagos-based Intellectual Property and Technology Law lawyer, writes via nworaikechukwuobiora@

The post Towards securitisation of intellectual property rights appeared first on The Sun Nigeria.

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