Banking on IP?

It has been 10 years since the UK Intellectual Property Office (UKIPO) and Department for Business Innovation and Skills (BIS)-commissioned report Banking on IP1 was published. The report examined how effectively small- and medium-sized enterprises (SMEs) are able to use intellectual property (IP) assets to secure finance. The report was extremely detailed, running to 224 pages, but the short answer was that ‘IP and intangibles are, in effect, unbankable’.2 There were a number of actions taken by the UKIPO following the report but, at its 10th anniversary, has much really changed? Tellingly, the UKIPO corporate priorities for 2023–24 include an aim of identifying interventions to support innovative businesses to secure financing based on their IP.3 This suggests that there is still work to be done. What are the obstacles? What has been done in the last 10 years? By way of background, in 2012, BIS identified that there were issues with SMEs obtaining financing.4 The Banking on IP report was commissioned to ‘investigate the barriers into the broader use of IP and related business intangible assets for debt and equity fundraising’. The report made the following two high-level recommendations (as well as 10 more detailed recommendations): a resource toolkit should be put in place to assist in value realization and existing initiatives (e.g. patent box, Enterprise Finance Guarantee) should be built upon to raise awareness and appreciation of IP. The UKIPO has taken action since the report was published. An active response to the report was published in 2014.5 This was followed by the launch of an IP finance toolkit6 in 2015 and IP access fund in 2021.7 To further the aim of deeper appreciation of intellectual assets, the UKIPO has also been liaising with international finance bodies and commented to the UK financial reporting council on the UK reporting standard.8 In this time, the UK Government also undertook the Patient Capital Review9 to ‘strengthen the UK as a place where innovative firms can obtain the long-term “patient” finance they need to scale up’. British Patient Capital (a subsidiary of the British Business Bank) was launched to invest in innovative UK companies with an initial £2.5bn to invest over 10 years.10 Following the launch of British Patient Capital, the UKIPO published a joint paper with the British Business Bank on using IP to access growth funding.11 This identified some opportunities and challenges facing IP-based finance. There have demonstrably been efforts to put tools in place to support businesses, and new initiatives have been rolled out as recommended by the Banking on IP report. Nevertheless, IP finance does not yet appear to be mainstream in the UK. One form of financing where IP has been leveraged, perhaps most notably in the music and film world, is securitization. In the context of IP, this may be structured by cash flows generated by IP (eg royalties) being packaged into interest-bearing listed securities, which can then be traded on the secondary market. This form of finance can be of significant utility where an entity is seeking to raise funds against future cash flows. David Bowie famously sold the rights in his future royalties in his back catalogue for 10 years by way of ‘Bowie Bonds’ in 1997.12 He used part of the proceeds to buy back rights in his catalogue from his former manager.13 Historically, however, there have been few opportunities for companies to leverage IP assets as collateral for financing. In the period since the Banking in IP report, IP financing schemes have been launched in other countries, including Singapore and Canada.14 In Singapore, the scheme was launched in 2014 and ended in 2018, with only three loans being made. The scheme ceased due to high upfront valuation costs deterring applications, financial institution lack of familiarity with IP as collateral and the absence of secondary markets.15 The Canadian budget in 2021 included proposals to amend the Canada Small Business Financing Act and its regulations to expand loan class eligibility to include lending against IP.16 These changes were made in 2022.17 It is still in its early days, so it is unclear what impact this will have on IP financing in Canada. The Business Development Bank of Canada has separately put in place a $160m patient capital fund in place to support IP development and confirmed that it provided its first financing under this fund in 2021.18 Elsewhere, in 2021, World Intellectual Property Organization (WIPO) launched a series of publications on intangible asset finance. In a 2022 report, WIPO noted that ‘the field of intangible asset financing is still in its infancy’ with obstacles standing in the way of its growth. WIPO suggests that change ‘requires input from multiple sectors and disciplines’ and that the aim should be to ‘move intangible asset finance from the margins to the mainstream’.19 WIPO is working with a number of countries, including the UK, with further reports underway. Obstacles that have been consistently identified by reports into IP financing include the following: Liquidity: While licensing is common and there are sales of IP assets (eg acquisitions of patent portfolios by patent assertion entities), there are not established secondary markets for sale of IP. IP is inherently less fungible than other asset classes. If IP is used as collateral for a loan and the business defaults, then the lender could be saddled with an asset they are unable to sell. Valuation: IP tends to have most value to the entity that has created it and to the existing business in which it plays an integral role. Such IP may not be valuable to third parties. IP is unlike other assets—valuation can be far more complex and lack certainty. For example, changes in customer behaviour or invalidation of certainty of its IP rights could have a dramatic impact on the value of a company’s IP. Lenders have less certainty that they could recoup value if the borrower defaults. Regulatory issues: The internationally agreed that Basel III standards20 put in place (among others) minimum capital requirements for credit, market and operational risk as well as liquidity requirements that apply to banks. In the context of bank lending activities, the Basel III rules, as implemented in the UK, the EU, the US and elsewhere, set out prescriptive rules on what constitutes eligible collateral for the purposes of mitigating risks and consequently reducing the amount of capital that a bank is required to hold.21 While national implementations of Basel III vary, in general, collateral that banks can rely on under these rules is limited to financial collateral—namely, cash, shares, bonds and covered bonds, among others. The key is that the bank must be in a position to liquidate the collateral in an event of default scenario in order to generate cash proceeds quickly to reduce its risk exposure effectively. IP does not meet the criteria for eligible collateral. As a result, there is no capital benefit to banks in financing IP and so it is priced as if the IP financing was an uncollateralised asset, resulting in banks being disincentivized to provide IP finance. This may have a knock-on effect on businesses, which may experience increased costs for IP financing. There is a clear and ambitious desire to improve access to IP finance. This is being driven not only by the UKIPO but also by WIPO and other bodies around the world. However, at present, it appears that activity is still largely focused on gathering information and identifying ways action could be taken. As noted by WIPO, there are obstacles that need to be removed in order for the field to grow. Engagement will be needed not just from IP institutions but also from other sectors, including the financial sector. Perhaps in the next 10 years intangible asset finance will have moved ‘from the margins to the mainstream’22 as WIPO desires. It is possible that emerging technologies may support this aim. For example, we may see that distributed ledger technology leveraged in providing platforms for IP valuation and secondary marketplaces. It seems likely, however, that there will be no silver bullet for resolving certainty of the obstacles facing IP financing. It is possible that IP financing ends up focusing on certain categories of IP such as copyright in software and patents. Such rights may be more liquid and likely to be of more value to third parties compared with other rights. 10 years on from the Banking on IP report and you can’t, quite yet, bank on IP.

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