United States: Considering Intellectual Property Securitisation

Last Updated: January 27 2005
Article by Keith W. Medansky and Alan S. Dalinka

This article first appeared in IP Value 2005 - An international guide for the boardroom, published by Globe White Page, www.buildingipvalue.com

The World Intellectual Property Organisation (WIPO), among others, describes the securitisation of intellectual property (IP) assets as "a new trend". It has now been more than seven years since the introduction of the so-called Bowie bonds - regarded as the first ever music royalties future receivable securitisation - which gave rise to IP securitisation as a financing vehicle. In the years since the introduction of the Bowie bonds, a great deal has been written in the business and legal press and in academic journals about securitizing various IP portfolios from copyrights (particularly those associated with music and film) and patents (particularly those associated with pharmaceuticals and high technology) to trademarks and even trade secrets and domain names.

But publications on this subject seemed to have peaked between 1999 and 2002. Since then, fewer new significant articles have been published, and there has not been any significant increase in the number or scope of deals reported. The natural question then is: what happened to all of the excitement? Perhaps securitisation was caught in the wake of the financial correction following the dot.com market crash. Or perhaps risk assessment in intellectual property securitisation just has not reached sufficient maturity yet to lead to the predicted boom.


Securitisation transactions involving traditional financial assets have been around since at least the 1980s. In the days before the Bowie bonds, typically the assets being securitized related to tangible receivables such as real estate leases, supply contracts and the like. Such tangible receivables have predictable revenue streams and credit rating agencies are well familiar with the associated risks. In the case of intellectual property rights, the receivables may be licence royalties or other predictable cash flows from the intellectual property.

The owner of the receivables, who is called the originator, groups receivables together and transfers them to a special-purpose vehicle (SPV) that is formed for the sole purpose of acting as an issuer of the securities based on the receivables. The SPV issues debt or equity to investors and uses the proceeds to pay the originator. Debt issued by the SPV (bonds or the like) is serviced by the receivables; equity interests issued by the SPV results in the SP passing through the revenues produced by the receivables. Recording the security interests in the property secures the commitment to pay the receivables with recourse to seize the property in the event of a default.

No matter what form of security is issued by the SPV, the SPV is created in an effort to make the securitised asset remote from the assets of the originator so that in the event of the originator's bankruptcy, the court will not include the asset as part of the originator's estate. The bankruptcy court will look at the originator's transaction with the SPV to determine whether it is, in fact, a true sale and not just a mere loan. The real transfer of the assets to the independent SPV thus also separates the originator's finances in such a way that the originator's creditworthiness ought not to be considered a risk factor that should weigh on the creditworthiness of the securities issued by the SPV.

Securitisation of tangible assets

In the realm of tangible assets, the risks are largely visible in a securitisation transaction. Take for example the securitisation of a portfolio of real estate leases. In this example, a landlord (the originator) transfers to a trust (the SPV) its lessees' rent obligations over a period of 10 years in exchange for a lump sum payment. The trust sells bonds backed by the leases with a 10-year maturity, and takes and records a security interest in the leases. The two biggest risks in this sort of hypothetical scenario are fairly plain to see, and are capable, to at least some degree, of being accounted for or mitigated:

  • tenants may fail to pay rent - that may be accounted for in due diligence investigation by reviewing the lessees' creditworthiness; the tenants contracting to mitigate the damage to the lessor (or, more likely, its assign, the SPV); obtaining the lessor's right to sub-let to mitigate, etc.
  • the real estate could be damaged in such a way that the tenants are not required to pay rent (e.g., they are not able to inhabit the building) - that may be mitigated by insurance or at least accounted for in the predictable ways in which the damage could occur such as by fire, flood, acts of terrorism, etc.

While, like the real world, this tangible example does not provide a perfect revenue stream, it is a highly predictable revenue stream that can be assigned a reasonably accurate credit rating based upon experience with similar leases or an established history for the property at issue.

Bowie bonds

David Pullman was responsible for arranging the first securitisation of intellectual property. Musician David Bowie was looking for financing opportunities for, among other things, buying out his manager's minority share interest in his music catalogue. Bowie's objectives meant he was looking for a way to raise a lump-sum cash amount rather than to rely upon an income stream - indeed, Bowie reportedly had a regular cash flow of more than US$1 million per year from ownership rights in the copyrights in much of his music catalogue dating back to the 1960s and to the recording masters. So rather than entering into a new traditional distribution agreement at the expiration of his existing recording and distribution agreement, Pullman devised the Bowie bonds to meet Bowie's need for upfront cash.

Only limited information about the structure of the transaction is publicly available. Certainly, an SPV was formed. The assets Bowie sold to the SPV included the right to certain future royalty payments from 25 pre-1990 albums he recorded (more than 300 copyrights). The SPV issued bonds and Bowie's record distributor, EMI, provided certain credit enhancements. The bonds received a triple A investment grade rating by Moody's Investors Services.

The bonds had a 10-year average life and had a maturity of 15 years. Prudential Insurance Company purchased the bonds, netting US$55 million for Bowie. In a debt offering of this kind, the underlying copyrights would be used to secure the bonds. If the SPV defaults on its payment obligations to bondholders, the copyrights are permanently transferred to the bondholders. Until the event of default, of course, the copyright owner would retain the copyrights subject to a security interest held by the bondholders. After the bond obligations are met, the copyright owner holds the copyrights free of the security interest (just as a homeowner that has paid mortgage debt in full owns a home free of the mortgage).

The security interest in the copyrights would be perfected to allow the bondholders' claims to take precedence over most unsecured claims. The procedure used to perfect security interests in copyrights in the United States is the subject of some debate. Article 9 of the Uniform Commercial Code (UCC) does not mention copyrights and there is some question as to whether collateral interests in copyrights should be perfected by filing a UCC-1 financing statement in the appropriate states as general intangibles under the UCC or by recording a collateral assignment in the Copyright Office. Although recent case law suggests that security interests in copyrights can only be perfected in the Copyright Office, out of an abundance of caution, most careful lenders perfect security interests in all IP rights (patents, copyrights and trademarks) at the state and federal level (Patent Office, Copyright Office and Trademark Office, as the case may be). It should be noted that perfecting security interests in property in the United States varies with the type of property and is largely a function of state law rather than, as is the case with intellectual property law, with reference to a combination of state and federal law.

Other intellectual property securitisations and the risks

The Bowie bonds are not the only example of IP securitisation. Other musicians have done similar securitisations involving their music catalogues. There also have been securitisations involving film catalogues as well. At least one securitisation involving patents for drugs has been done and publicised. Indeed, quite a few published articles have theorised that the possibilities for securitisations include portfolios of trade secrets, trademarks and domain names as well. However, if there have been such transactions, they have been kept fairly confidential and private.

When considering the intangible nature of intellectual property, perhaps it is not surprising that securitisations in this field have not become everyday, well-publicised transactions. Each type of intellectual property comes with its own peculiar set of complexities and unknown risks that are not common to commercial ventures involving tangible property.

Copyright issues

In dealing with copyrights, there are several risk factors that need to be analysed. Even in the Bowie bond transaction, it has been reported that the examination and definition of all of the applicable revenue streams associated with the securitised music catalogue required more than a thousand pages of documentation.

Ownership of the copyright is one of the first issues to consider. The United States no longer requires registration of a post-1989 work for copyright to vest in its author(s). Determining who the author is or who the joint authors are may not always be a straightforward investigation. Certainly assignments and other encumbrances must be considered. Depending on the work, heirs may have rights in the work upon the originator's death and the creator of the work may have the right to terminate any transfer of the copyright under 17 USC §203. The Section 203 right to terminate transfers is particularly problematic because under 17 USC §203(a)(5), the termination may be effected notwithstanding any agreement to the contrary. Thus, the risk of a reversion of rights must be considered when valuing the property.

Likewise, if a work is of joint authorship, each joint author has a right to royalties derived from the work, and if less than all of the joint authors are participating in the securitisation, valuation will be effected and careful consideration will need to be paid to the joint author's or authors' rights. Of course, whether the work was a work for hire also needs to be considered, and if a work is a work for hire, where the work was created by an independent contractor rather than an employee of the purported copyright owner, the documentation of the work-for-hire agreement must be carefully considered as well.

Ownership issues can likely be resolved to at least a reasonable degree of certainty. One needs to be aware, though, that perfect certainty probably can never be achieved. Since the copyright registration process does not involve a scouring of all works to determine whether a registered work infringes another preexisting work, there will always be at least a modicum of risk that another author will initiate a successful infringement action that not only undermines the validity of the copyright and decimates the royalty streams, but places the originator at further risk of a fraud claim by the SPV (and, perhaps the bondholders) for representations made in the initial transfer. Certainly an honest originator would be able to defend the fraud claim on the basis of lack of knowledge of the infringement, but no originator's copyright could completely escape the consequences of a successful copyright infringement action.

Assuming that ownership issues can be resolved to a reasonable degree of certainty - and with research and diligence one would normally expect them to be and to accept the risk of the unknown - the sources and magnitude of possible royalty streams need to be analysed and valued. Indeed, valuing the royalty stream and its reliability is of critical importance to the investors who purchase royalty-based intellectual property securities. For the originator and underwriters, these valuation issues underlie the legal disclosures required in their offerings under the securities laws and the assumptions driving the transaction. For example, in the case of Bowie's catalogue, the revenue streams were originally expected to be from traditional performance and distribution rights - such as radio play, records/tapes/discs sales, motion picture use, etc throughout different countries in the world. Today, revenue also comes from new streams such as digital distributions (e.g., iTunes(r)). The changes in the marketplace that brought new sources of revenue based on digital distribution, also brought unforeseen competition that has impaired the value of the original Bowie bonds. No one expected at the time the Bowie bonds were first offered that the demand for paid recordings of Bowie music would be threatened by illegal free peer-to-peer file sharing.

The recording industry has aggressively and publicly begun to fight widespread digital piracy on the Internet in peer-to-peer sharing networks. The estimates of lost revenue in this area are huge.

In any securitisation transaction, the threat of infringement needs to be considered. In some cases, it may be appropriate for the originator to take legal action to terminate infringement of the underlying copyrights and protect the demand for the subject works from unfair competition by infringers. The transactional documents need to explain how the infringement cases will be handled, who will control and pay for the litigation, and who will receive the benefits of settlement payments or a judgment from a successful trial.

Just as the threat of infringement can impact value, historic revenues may prove non-predictive for copyright securitizations due to other intangibles. Music and movies are part of pop culture, which has a way of changing rather rapidly. The popular music of the 1980s or even the popular films of the 1980s are not, as a whole, as popular today and how popular they may be a decade from now is really but conjecture. Tastes change.

Whether any particular music or film catalogue has any real staying power in the marketplace is probably not predictable with a large degree of certainty. Similarly, revenues relating to copyrights in expressive works also can be subject to the personality of the artists that create them. An artist that no longer has an incentive to promote a past work - let alone produce new works that keep the artist in the public's eye - may become forgotten. Or worse, an artist that is accused of some crime of moral turpitude may see his or her works publicly shunned or treated worse.

The more predictable the revenue generated by an IP royalty portfolio, the greater the opportunities from securitisation. But no one can really successfully predict what other forms of distributions are yet to come and how they may affect future revenues (whether positively or negatively). Thus, valuation remains a main, if not the main, legal and business challenge in structuring IP securitisation transactions.

Other intellectual property

Patents, trade secrets and trademarks have also been the subject of interest for securitisation. In principle, each can generate a stream of royalty income that can be securitised in much the same way described above with respect to copyrights. Valuation of royalty income in patents and technology can present many unique challenges. Indeed, when dealing with technology, the question of obsolescence also comes into play. The promoters of eight-track players and Betamax(r) recorders all had some success for a number of years and there may still be valid IP rights owned relating to these technologies.

Though there was probably a point in time where each technology looked like the technology would produce a revenue stream for a significant amount of time into the future, one can see from today's vantage point that none of those technologies could possibly produce the revenue streams of days past.

Trade secrets are, themselves, only really recognised as a product of local state laws in the United States. (There is a Criminal Theft of Trade Secrets Act on the federal level, but for the definition of what is a trade secret, one must look to state law.) On one hand, trade secrets are very intangible property: a trade secret may be reverse engineered legally; may be purposely disclosed to the public for a business reason; and/or may be inadvertently disclosed to the public. Thus, most trade secrets probably do not lend themselves to securitisation.

On the other hand, so long as a trade secret remains confidential and not reverse engineered, it continues to exist in perpetuity. There are certainly some trade secrets that have long established royalty streams - the secret formula to a certain popular soft drink and the secret herbs and spices for cooking fried chicken are two famous examples. There is no obvious legal reason why royalty streams from these assets could not be securitised. However, as a practical matter, the proprietors of these trade secrets may not want to part with the full control of their valuable assets or put them at risk in the event of default.

Finally, securitisation of trademarks presents many unique concerns. In the United States, a trademark cannot be assigned without its goodwill. Franchise and distribution systems are often built around trademarks (and, more recently, domain names) and the goodwill associated with them, typically in conjunction with some trade secrets. Securitising a portfolio of trademarks (or domain names) requires extreme care to avoid severing the goodwill from the trademarks and still to maintain quality control over the use of the marks in commerce. Upon default, the goodwill must pass with the marks to the secured bondholders or the value of the marks may be jeopardised.


IP securitisation remains a valid financing technique which allows rights holders to obtain the financial benefits of a present lump sum in exchange for the right to receive royalties from their works over the long term. For a securitisation to be successful, the value of the royalty stream in question must be predictable and the risks that may undermine the demand for the goods protected by the IP must be understood. As technology evolves it may be difficult to predict how market forces (e.g., peer-to-peer file sharing) may impact intellectual property valuation and such uncertainty may temper enthusiasm for this financing technique. However, with appropriate due diligence precautions, cautious asset identifications and careful valuations, securitisation is viable and should be considered as a way to monetise intellectual property.

This article is intended to provide information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions