Intellectual property rights (IP) are an important part of many businesses' assets. This is particularly true if that IP has material value and healthy underlying revenue streams which generate positive cash flow.
Where a business has financing needs, its valuable assets play a key role in determining the security cover available to a financier as collateral for a loan or other type of finance.
However, a report has identified that the full value of IP is not always factored into financiers' lending decisions. Therefore, IP-rich businesses may be losing out on their ability to extract greater value from their Intellectual Property for financing purposes.
The report
The report, titled ‘Country Perspectives The United Kingdom's Journey', has been published by the World Intellectual Property Organization as part of its ‘Unlocking IP-backed financing series' . The series examines the use of IP for financing in several jurisdictions, including the UK, Singapore, Turkey, Switzerland, Luxembourg and China.
The report was launched by the UK Government in March 2024 and examines several key aspects of IP finance. With a particular focus on accessibility of IP finance for small to medium size enterprises, it looks at areas including:
- the types and sources of IP finance in the UK and related trends in their use
- the legal and regulatory framework for IP finance and complications which might make the use of IP finance more challenging (including accounting standards and capital treatment by banks)
- non-regulatory factors that may impact on the use of IP for financing purposes, (including the basis of valuing IP, unfamiliarity with IP in a finance context and other perceptions around IP)
- the role of the UK Government and devolved governments in Scotland, Wales and Northern Ireland in helping to overcome barriers to the wider use of IP finance
- case studies on the use of copyright, patents, trademarks and copyright protected software in an IP finance context.
Considering finance options and putting finance in place can be a time-consuming exercise, but the report provides useful commentary and pointers to those looking at this subject for the first time and highlights the types of issues that may arise in an IP finance context.
Other considerations
The UK's National Security and Investment Act 2021 regime may also introduce complexities and additional considerations when assessing the use of Intellectual Property finance.
This is because the Act requires certain acquisitions/transactions to be notified, screened and cleared before they can complete. It also allows the Secretary of State to review certain previous acquisitions or transactions on national security grounds.
This may catch assets of an Intellectual Property flavour or shares and related rights in the underlying business holding the IP, particularly where they relate to one of 17 key areas of the economy (for more details of which see the Cabinet Office Guidance: National Security and Investment Act: details of the 17 types of notifiable acquisitions).
The Act's toughest sanctions can make a transaction void or require it to be unwound, which will be an undesirable proposition from a financing perspective if it materially affects the financier's collateral cover or the borrower's ability to service principal, interest, fees and costs.
In mitigation, the UK Cabinet Office's Annual Report for 2022-23 on the first full year of the Act indicated that so far, the enforcement of the toughest sanctions under the Act have been relatively few and far between, but that does not necessarily mean that the Act is a no-risk regime when considering IP finance or relying on IP related collateral. The annual report for 2023-24 is expected later this year and should shed more light on whether the UK Government's stance has toughened and any identifiable trends.
The future direction of travel
The report is a positive development in the further roll out and use of Intellectual Property finance and continued support from the UK Government and education on the topic will undoubtedly help the wider market to focus on ways of overcoming existing barriers.
Furthermore, businesses and financiers operating cross border may wish to take note of the content of the other jurisdictional reports mentioned above.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.