IP risk management in investment and financing

With the rise of economic globalisation and the knowledge-based economy, intellectual property (IP) has become an important part of a company’s core competitiveness. Consequently, IP risk management has garnered increasing attention in the realms of investment and financing.

This article provides valuable guidance on IP risk management in investment and financing.

KEY RISKS

1. Uncertainty of risk prediction. The value of IP is affected by various factors such as technological development, changes in the market environment, and shifts in laws and regulations. The unpredictability of these factors poses a challenge to IP risk prediction.
2. Difficulty in risk assessment. Evaluating the value of IP is challenging and requires the expertise of specialised IP valuation organisations. However, there are many difficulties in IP valuation such as inconsistent evaluation standards and incomplete data, which increase the complexity of assessing IP risks.
3. Challenge in risk control. IP protection depends on the improvement and promotion of judicial practice. However, it is objectively acknowledged that professionals involved in IP protection, including the adjudicators of judicial authorities, have different understandings of IP. Additionally, differences in IP systems, and laws and regulations, across countries and regions make it difficult to control IP risks.
4. Wide-ranging impact of risks. Losses in IP affect not only the economic interest of a company but also its reputation and market position.

MANAGEMENT METHODS

IP risk management is an important part of investment and financing. Investors need to conduct a comprehensive analysis and assessment of the target company’s IP to gain profound understanding of its IP status and risks.

Pre-investment due diligence. Before investing, investors must conduct due diligence investigation to comprehensively analyse and assess the target company’s intellectual property including patents, trademarks, copyrights and trade secrets.

Key aspects of due diligence investigation include:

1. Quantity and quality of intellectual property. Investors need to know the quantity and quality of the target company’s intellectual property including patents, trademarks and copyrights.
2. Value of intellectual property. Investors should evaluate the market, and the technical and commercial value of the target company’s intellectual property.
3. Protection status of intellectual property. Investors need to understand the scope, system and measures of the target company to protect its intellectual property.
4. Risks of intellectual property. Investors need to understand the risk of infringement, invalidation and protection of the target company’s intellectual property.

Post-investment management. After investment, investors need to manage intellectual property of the target company in a comprehensive manner for a better understanding of its IP status and associated risks.

1. IP protection. Investors need to enhance IP supervision, refine IP protection systems and elevate the level of IP protection.
2. IP utilisation. Investors need to intensify efforts in IP development, promote the application of IP and strengthen IP commercialisation.
3. IP operation. Investors need to actively develop IP operation strategies, establish IP operation entities and reinforce oversight of IP operations.

IP INSURANCE

IP insurance is an effective way to manage IP risks, and can provide both risk coverage and financing channels for investors. Additionally, it can promote the creation, protection and utilisation of intellectual property.

Over time, IP insurance has evolved into a well-established form of insurance internationally, mainly including patent insurance, trademark insurance, copyright insurance and trade secret insurance.

However, the development of IP insurance is affected by the following factors:

1. Increased awareness of IP protection. As the significance of IP grows, companies are becoming more conscious of safeguarding their intellectual property, resulting in a corresponding increase in demand for IP insurance.
2. Escalation of IP risks. With IP gaining greater significance, the risks associated with IP are steadily rising, leading to an increased demand for IP insurance among companies.
3. Development of IP valuation techniques. The development of IP insurance cannot be achieved without the support of IP valuation. With the development of IP valuation techniques, the value and risk of intellectual property can be more accurately assessed, providing a more reliable foundation for IP insurance.

Although the scope of IP insurance has expanded extensively over time, there are also many problems such as high insurance costs, complex insurance liabilities and difficulties in claim settlement, which require adequate risk assessment and management by investors.

KEY TAKEAWAYS

To sum up, IP risk is a crucial concern in the investment and financing process. Investors need to comprehensively analyse and evaluate the target company’s intellectual property and strengthen IP protection, utilisation and operation.

Additionally, exploring various approaches such as IP insurance becomes necessary to effectively manage IP risks, providing both risk coverage and financing channels for investors, and promoting the creation, protection and utilisation of intellectual property.

Liu Yue is a senior partner at DOCVIT Law Firm

DOCVIT Law Firm
56/F Fortune Financial Center
No.5 East Third Ring MiddleRoad
Beijing 100020, China
Tel: +86 10 8586 1018
Fax: +86 10 8586 3605-8006
Email: liuyue@dtlawyers.com.cn

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