IP securitisation in China: origins, development and present status

By Li Yanbo and Wang Chenghao, Zhilin Law Firm
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The US produced the world’s first intellectual property (IP) securitisation product in 1997. China followed about two decades later, but has since seen the rapid growth and diversification of products.

WHAT IS IP SECURISATION?

IP securitisation entails that the initiator (often an innovative enterprise) transfers its IP or derivative claims (such as authorised royalties) to a special purpose vehicle (SPV). After the assets are repackaged and have their credit evaluated and enhanced, the SPV sells securities with the assets as collateral to provide financing for the original owner.

The securitisation of IP creates a kind of asset-backed security (ABS). The main distinction from a conventional ABS lies in the different underlying assets. Securitisation of IP is based on the property rights related to the predictable and steady future cash flow of IP. In other words, the securitisation of IP is backed by its predictable future benefits.

GERMINATION

On 13 March 2015, the Several Opinions of the Central Committee of the Communist Party of China and the State Council on Deepening System and Mechanism Reform and Accelerating the Implementation of an Innovation-Driven Development Strategy proposed to strengthen the capital market’s support for technological innovation, “promote the revision of relevant laws and regulations, and explore the development of IP securitisation”.

IP securitisation in China
Li Yanbo
Associate
Zhilin Law Firm

This was the first time that the central government had issued a document formally mentioning IP securitisation, and 2015 is therefore the “first year of policy” for the sector.

On 14 December 2018, the Shenzhen Stock Exchange approved the First Capital-CUL&TECHFLCO ABS Plan Phase I, the first IP securitisation product in China, adopting the sale-leaseback mode of IP.

On 21 December 2018, the Shanghai Stock Exchange approved the Special Programme of Financial Assets Support for the IP Supply Chain of Qiyi Century, which was the first IP supply chain ABS product in China. Several scholars said this was a brand new attempt to promote the effective integration of China’s IP and financial resources, and that it represented the beginning of China’s IP financing from pledge to securitisation.

DEVELOPMENT AND CURRENT STATUS

IP securitisation has developed relatively quickly in the past three to four years, with a series of products emerging. By 31 December 2021, more than 60 IP securitisation products had been issued nationwide.

There are four types of IP securitisation: the financing lease model mentioned above; the IP assignment accounts receivable model, adopted in the supply chain example; the secondary licence, which was the transaction model created first in China’s IP securitisation practice, adopted in Xingye Yuanrong-Guangzhou Development Zone Patent Licensing Asset Support Special Plan; and the IP pledge loan.

The use of IP securitisation is spreading across the country, with at least 10 cities having seen local launches of products. But the distribution remains uneven. Shenzhen and Guangzhou have many more products than other cities. The State Council has approved the Guangzhou Development Zone as the first place in China to conduct a comprehensive reform trial on the use and protection of IP.

IP securitisation products cover a wide range of industries, and there are many special-themed products centring on emerging high-tech. By the end of September 2022, the SZSE had issued 65 IP securitisation products, raising about RMB16 billion (USD2.3 billion), in the fields of the digital economy, AI, intelligent manufacturing, national high-tech strategic innovation, 5G, specialisation and sophistication, biomedicine, SMEs, pandemic prevention and control, talent demonstration sites and multiple other specialised themes, Shanghai Securities News reported the following month.

IP securitisation in China
Wang Chenghao
Associate
Zhilin Law Firm

Finally, from the perspective of the issuance effect, IP securitisation has effectively transformed IP into assets fully reflecting the marketability and liquidity of IP. Based on existing practice, IP securitisation has become an effective way for technology-based SMEs to solve financing problems, and the financing cost is lower than traditional IP financing methods.

The issuance of IP securitisation products on the SZSE has benefitted about 970 technological innovation companies and revitalised more than 3,300 intellectual properties. Among them, there are about 900 private technology companies, accounting for 93%, with an average financing of about RMB15 million and an average financing cost of 3.85%.

At present, China’s IP securitisation is still in the growth stage, and various difficulties and problems have been encountered in the process. It is unlikely the future development will be all smooth sailing. But it is undeniable that IP securitisation is no longer just a concept and policy, but a welcome and concrete alternative route to solve the financing challenges of technology-based private enterprises.

Li Yanbo and Wang Chenghao are associates at Zhilin Law Firm

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chenghao.wang@zhilinlaw.com

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