Exploring the practice of intellectual property securitisation

By Xiao Qun, Hylands and Xu Junhua, China Overseas Holding Group
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In recent years, the exploration of the practice of intellectual property (IP) securitisation has frequently recurred. In January 2021, the Futian District – Ping An Securities – High Tech Investment Intellectual Property No. 2 Dedicated Asset-Backed Plan, valued at RMB139 million (US$21.49 million ), was successfully offered and received policy subsidies from the Futian district government. On 25 December 2020, the Suzhou Industrial Park First Phase Dedicated Intellectual Property Asset-Backed Plan, valued at RMB45 million and involving 67 patents granted to eight small and medium-sized biomedical enterprises in the park, was successfully offered.

肖群, Xiao Qun, Partner, Hylands
Xiao Qun
Partner
Hylands

Against a background of intensifying IP protection along the entire chain, the promotion of IP securitisation, enhancement of the rate of utilisation of IP, and the promotion of the rapid development of micro, small and medium-sized science and technology enterprises will become one of the financial innovation targets for financial support to the real economy, and financial support for scientific and technological innovation in 2021.

This article, in light of the authors’ research and thinking on IP securitisation, addresses a few key issues in the hope that this will help in the drive to make IP securitisation truly take root in China.

In brief, the term “intellectual property securitisation” means the process of packaging the cash flows generated by IP and its derivative rights into a security tradeable on the secondary market, all with the objective of raising funds. The prerequisite to the realisation of IP securitisation is the availability of IP and derivative rights that can generate future stable cash flows to serve as the underlying assets. There is no substantive difference between the securitisation of IP and any other manner of securitisation, the only difference being the underlying assets that back the securitisation.

A condition for the successful securitisation of IP is that the IP and its derivative rights that serve as the underlying assets can be easily confirmed, valued, priced, traded and disposed of. It goes without saying that the smooth implementation of IP securitisation cannot be divorced from the assurances provided by state systems and, at the policy level, from the active participation of such intermediary firms as financial institutions, accounting firms, law firms, asset appraisal firms, etc.

It also cannot be divorced from the reverence paid to finance by, and the good faith of, the high-tech enterprises themselves, and much less from the credit enhancement, subsidies, support, etc., provided by governments at various levels, and high-tech innovation parks.

As compared to traditional pledge-backed financing, IP securitisation is an innovation that has positive significance for governments, the capital markets and, in particular, high-tech enterprises.

From the government’s perspective, IP securitisation is conducive to mobilising the force of all of society in supporting the state’s scientific and technological innovation strategy, sharing the government’s responsibility for promoting the scientific and technological innovation strategy, and dispersing the risks.

From the perspective of science and technology enterprises, firstly, it can maximise the economic value of IP through market mechanisms. and effectively maintain the motivation of science and technology enterprises and researchers to pursue scientific and technological innovation.

许均华, Xu Junhua, Vice president, China Overseas Holding Group
Xu Junhua
Vice president
China Overseas Holding Group

Second, it permits the effective use of IP assets to resolve the issues of difficulty, expense and slowness in raising financing faced by micro, small and medium-sized high-tech enterprises. From the perspective of the capital markets, IP securitisation can promote business innovation by financial institutions and relevant intermediary firms, and increase the investment products available on the capital markets. From the perspective of social progress, IP securitisation can promote scientific and technological innovation, and allow these achievements to better serve the public.

Needless to say, in practice, several difficulties exist in promoting IP securitisation, mainly as follows:

(1) uncertainty in the validity of the IP rights, e.g., the possibility that the supporting document for a patent, trademark, etc., from the administrative authority could be declared invalid and, once invalidated, would be invalid ab inicio;

(2) the fluctuation in the value of the IP rights, e.g., the commercial value of a proprietary technology, computer software copyright or customer list changes with the generational change in technology and development of the market;

(3) the lack of stability in the income generated by certain IP serving as the underlying assets, resulting in a rupture in the cash flow, e.g., interruption of the income from a patent licence or trademark licence; and

(4) in the event of a default on the financing by IP securitisation, it is often difficult to quickly dispose of and realise the underlying assets of the IP securitisation.

Resolution of the above-mentioned issues may be approached as follows:

(1) breakthroughs in the innovation parks, as governments and judicial authorities at various levels have, through a series of new measures, encouraged IP-related financial innovation;

(2) starting from small-scale pilot projects, selecting the best from the various IP securitisation practice models (including the initial IP pledge financing model, the quasi asset securitisation model with IP income as the core, and the core enterprise-led aggregated IP securitisation model with credit sharing as the leitmotif);

(3) active encouragement of the development of various intermediary firms that provide services for IP securitisation to open up the “last mile” to implementation; and

(4) fully leveraging the functions of local governments with credit enhancement measures such as the making up of shortfalls, liquidity support, etc., provided by local governments playing a key role in the successful offerings of projects.

In the future, we will continue to strive to explore replicable and promotable operating models in specific fields and industries with the objective of creating a new environment in which financing can be secured through IP securitisation.


Xiao Qun is a partner at Hylands. She can be contacted on +86 10 6502 8936, or by email at xiaoqun@hylandslaw.com

Xu Junhua is the vice president of China Overseas Holding Group. He can be contacted on +86 138 1068 5180, or by email at peimin@hylandslaw.com