141. The United States is pleased to co-sponsor this agenda item on IP and Innovation and contribute to the discussion of "IP for Investment/Financing/Funding." I would like to thank the United Kingdom for introducing this agenda item and the co-sponsors for this item and all of the other Friends of IP and Innovation items. The United States welcomes this opportunity to discuss how a company's IP assets can be used to attract follow-on investment and financing, leading to further opportunities for innovation and growth of the business.
142. The impact of the implications of the COVID-19 pandemic has led to many companies seeking ways to preserve cash to improve their financial position while simultaneously raising funds to ensure a continuation of operations. One option to consider is using the company's intellectual property (IP) portfolio as collateral for funding or to gain access to credit – also known as "IP-backed financing".
143. Intangible assets account for trillions of dollars in value in the US economy and as a result, billions of dollars have been injected into IP finance. It is critical that both business owners and their advisors understand not only where intangible asset value is found, but also how to access it. Effective IP financing can be a competitive advantage and a tool for growth.
144. According to data from the US Patent and Trademark Office, the number of patents recorded by the USPTO as having ties to a "security interest" or "security agreement" almost doubled to 400,000 during the four years ending in 2019 when compared with the prior four years.
145. In the case of lenders who are otherwise on the fence about whether to put forth a loan to a company in need, an IP portfolio can be a hidden source of collateral, especially when the IP rights are generating revenue through licensing, patent assertion, or sales.
Definitions and examples
146. There are various financial practices in which IP assets can function as a source of financing. These include securing venture capital, using IP as a collateral (i.e., to secure a loan), or IP securitization, which is still relatively rare, but refers to when IP assets are pooled together and packaged into an interest-bearing security.
147. In recent years, IP asset-backed securitizations are most common in the film and music industries, but the practice is increasing in the biotechnology and software industries. Licensing revenues associated with clothing designs and sports and film broadcastings, patents and trademarks, including the goodwill tied to them, have all been successfully leveraged.
148. With respect to IP-leveraging in the biotech field, small and medium-sized enterprises (SMEs) and university entrepreneurs in the United States are increasingly at the forefront of innovation in medicines, but as relatively small companies or start-ups, they often require external investment to help them fund their research and in turn generate significant licensing cash flow. A number of economic studies over the past 20 years have shown that patenting activity by a start-up significantly increases the likelihood that that start-up will obtain venture capital funding or other types of investment. Further, a 2018 study which analysed venture capital backed start-ups, found that more than 25% of the patents awarded were then used to secure loans.
149. Recent conversations with SMEs and investors supported these trends. For example, in speaking with a VC at Techstars Berlin who has invested in start-ups in the UK, EU and US markets, he confirmed that more than 50% of the biotech start-ups he has worked with already had some sort of IP or were taking active steps to secure IP protection to help enhance their reputation and to secure external funding. The importance of IP grows, he added, as a company matures and is seeking additional investment for growth or acquisition. He noted that the other half of biotech startups that do not seek IP protection have struggled with lack of IP awareness, concerns over cross border patent prosecution inefficiencies, and theft of IP. The VC's comments are a reminder of the need for governments to continue providing tools and resources that build awareness for startups and SMEs on the importance of IP protection, international registration, and how to report and prevent infringement.
150. A telecom SME CEO further explained in a recent call that without using their IP portfolio, they not only would have been unable to finance the development and growth of their company, they also would have been unable to pay for litigation in the US to enforce against the infringement of their technology by much larger telecom companies. In another example of how to leverage an IP portfolio, the telecom SME was able to use their patent to finance their patent infringement case. "Litigation funding", also known as "litigation finance" or "third party funding," is an alternative means for a claimant to fund the costs of a legal dispute. Rather than paying litigation costs out-of-pocket, a commercial litigation funder finances the cost of the patent litigation in return for a share of any award or licensing revenue. The SME CEO noted that better awareness of IP financing options for SMEs will incentivize greater use of national and international patent systems, and without patent protection, it would have been impossible for his company to succeed.
Assessing IP and its Value
151. To leverage financing through IP, a business must understand the value of its IP assets. Valuing IP assets requires that a company first identify its IP assets, and second, assign a justifiable value to the identified IP assets; both steps require careful consideration. IP assets are more easily identified by a company in those instances where IP rights are embodied in a granting document, such as an issued patent or a registered trademark, also known as formal IP. However, non-formal/non-registered IP assets that may also qualify as a company's IP can be easily overlooked, such as: trade secrets; know how; business confidential information; and R&D. To ensure companies are confident that they are aware of all of their IP assets, an IP audit should be performed. A comprehensive IP audit generally includes an evaluation of a company's assets to identify its IP assets that it possesses, whether registered or unregistered IP.
152. In the United States, the USPTO's hub for start-up resources helps start-ups to address their specific IP challenges, including assessing IP portfolios and securing funding. Information can be found on USPTO's website for start-ups. In addition, the USPTO has partnered with the US Small Business Administration (SBA) to provide services to businesses seeking IP-leveraged funding, including loans, venture capital and SBA investment programmes. For those interested in intergovernmental organization support, WIPO has launched a new initiative for SMEs to undertake a basic identification and diagnosis of their IP assets. WIPO's online "IP Diagnostic Tool" can assist a company with an assessment of the IP assets that a business may have and how it may consider protecting and exploiting them, as well as the risks to the business of not managing these assets.
153. The second consideration for a business when pursuing IP-backed financing is IP valuation. Businesses must take steps to understand the commercial value of their IP, and ensure their proper valuation by professionals. However, valuing IP assets is often a difficult task because their true value may not be readily apparent A further obstacle is that there are no standard IP valuation methodologies developed that are generally applicable to all IP rights big or small. For the purpose of securitization, technical valuations of IP rights are required and support for companies, including those in developing countries, is very much needed.
Conclusion— The Intersection of IP Laws and Secured Transaction Laws
154. WIPO recognizes more should be done in this area, and as part of its emphasis on SMEs, the IP for Business Division within WIPO's IP and Innovation Ecosystems Sector is developing several new resources, including comparative country reports to better landscape the current situation; promoting discussions on IP and finance, such as the organization of expert meetings and the preparation of additional longer-term sustainable plans; and continuing to develop new programmes to explore the evolving area of IP and financing.
155. Despite the ongoing policy and legal gaps that exist at the national and international levels concerning the intersection of IP laws and IP financing laws, businesses and lending institutions increasingly need to understand both fields, and governments and intergovernmental organizations should do more to link IP to business strategies in order to facilitate the rise of IP assets as a fullfledged asset class. While this process may be largely driven by the market, policy makers can design and deliver awareness campaigns and contribute to increased reliability in valuation standards and IP audit of assets to support the shared goal of ensuring that access to capital is eased for those economic units with the greatest growth potential, namely start-ups and SMEs.