INTRODUCTION
This article aims to
examine an uncommon form of security in these climes, an intangible but yet
inestimable source of security – intellectual property (IP). According to the World Intellectual Property Organisation
(WIPO): “IP refers to creations of
the mind, such as inventions; literary and artistic works; designs; and
symbols, names and images used in commerce … IP is protected in law by, for
example, patents, copyright and trademarks, which enable people to earn
recognition or financial benefit from what they invent or create.”
examine an uncommon form of security in these climes, an intangible but yet
inestimable source of security – intellectual property (IP). According to the World Intellectual Property Organisation
(WIPO): “IP refers to creations of
the mind, such as inventions; literary and artistic works; designs; and
symbols, names and images used in commerce … IP is protected in law by, for
example, patents, copyright and trademarks, which enable people to earn
recognition or financial benefit from what they invent or create.”
THE
STATUS QUO – IS THERE ROOM FOR CHANGE?
STATUS QUO – IS THERE ROOM FOR CHANGE?
Security over real
property is the more common form in Nigeria, but such comes with its own
inherent problems. Key amongst these is the high cost of perfection of title,
without which, most institutional lenders are reluctant to provide funding.
Embracing IP security would increase the pool of assets from which the creditor
may satisfy his claim. It would also afford the debtor an opportunity to raise
money without impairing any of the physical assets of the business.
property is the more common form in Nigeria, but such comes with its own
inherent problems. Key amongst these is the high cost of perfection of title,
without which, most institutional lenders are reluctant to provide funding.
Embracing IP security would increase the pool of assets from which the creditor
may satisfy his claim. It would also afford the debtor an opportunity to raise
money without impairing any of the physical assets of the business.
For many IP rich but cash
constrained companies, traditional financing options may be unavailable or too
expensive. These companies own negligible tangible assets, owing their success
almost exclusively to their IP. For instance, it would be a no brainer for Fintech
companies like Interswitch, Systemspecs, OneFi etc. to leverage their IP (future
cash flows from existing IP assets, or rights to the underlying IP itself) for
financing purposes. .
constrained companies, traditional financing options may be unavailable or too
expensive. These companies own negligible tangible assets, owing their success
almost exclusively to their IP. For instance, it would be a no brainer for Fintech
companies like Interswitch, Systemspecs, OneFi etc. to leverage their IP (future
cash flows from existing IP assets, or rights to the underlying IP itself) for
financing purposes. .
SECURITIZING
IP – HOW WOULD IT WORK?
IP – HOW WOULD IT WORK?
According to Professor
D.E Allan’s “Securities: Some Mysteries, Myths and Monstrosities”, (1989, pg.
135): “anything that performs the function of security must be a security.” Security
will usually be taken over IP by way of a legal mortgage, a fixed charge, or a
floating charge. In my view, taking security over IP rights uses similar
concepts as taking security over other forms of property.
D.E Allan’s “Securities: Some Mysteries, Myths and Monstrosities”, (1989, pg.
135): “anything that performs the function of security must be a security.” Security
will usually be taken over IP by way of a legal mortgage, a fixed charge, or a
floating charge. In my view, taking security over IP rights uses similar
concepts as taking security over other forms of property.
Legal
Mortgage
Mortgage
A legal mortgage is
probably the safest form of security transaction; it would require that the IP
be assigned to the lender, with a license being granted back to the debtor.
This might pose a potential risk for the ongoing business of the debtor, and
also for the sub-licensees. The true underlying intention of the parties is not
to transfer the debtor’s IP to the lender but rather to use the IP as security
for payment of the debt.
probably the safest form of security transaction; it would require that the IP
be assigned to the lender, with a license being granted back to the debtor.
This might pose a potential risk for the ongoing business of the debtor, and
also for the sub-licensees. The true underlying intention of the parties is not
to transfer the debtor’s IP to the lender but rather to use the IP as security
for payment of the debt.
Fixed/Floating
Charge
Charge
A fixed charge is
created over specific property of a debtor and attaches to the property from
the time of its creation. The charge restricts the rights of the debtor to deal
with the charged property, without the consent of the party in whose favour the
charge is created. A floating charge is a security over the assets of the
company for the time being, i.e. over all or some parts of its present and
future property as a going concern. The difference between fixed and floating
charges relates to the debtor’s ability to dispose of its assets. With a fixed
charge, it has a very limited ability to do so but with a floating charge, it
is free to dispose of its assets in the ordinary course of business. Title and
maintenance of the IP secured by the fixed charge will remain vested in the
debtor. It is therefore important that the security agreement obliges the
debtor not to do/omit to do anything which may put the enforceability or
validity of the IP in jeopardy (including failing to pay renewal fees, take
action against infringers or grant of licenses to third parties).
created over specific property of a debtor and attaches to the property from
the time of its creation. The charge restricts the rights of the debtor to deal
with the charged property, without the consent of the party in whose favour the
charge is created. A floating charge is a security over the assets of the
company for the time being, i.e. over all or some parts of its present and
future property as a going concern. The difference between fixed and floating
charges relates to the debtor’s ability to dispose of its assets. With a fixed
charge, it has a very limited ability to do so but with a floating charge, it
is free to dispose of its assets in the ordinary course of business. Title and
maintenance of the IP secured by the fixed charge will remain vested in the
debtor. It is therefore important that the security agreement obliges the
debtor not to do/omit to do anything which may put the enforceability or
validity of the IP in jeopardy (including failing to pay renewal fees, take
action against infringers or grant of licenses to third parties).
Floating charges can
be created over the same IP rights as a fixed charge, though usually a floating
charge is purported to be taken over IP rights that cannot be identified
individually such as unregistered IPs. Unregistered IPs do not often make for
good security. Section 3 Trademarks Act (TA), Cap. T13, LFN 2004 for instance provides that no person
shall be entitled to institute any proceeding to prevent, or to recover damages
for the infringement of an unregistered trademark. However, this is different
in the case of copyright as a work, once created, becomes automatically copyrighted.
be created over the same IP rights as a fixed charge, though usually a floating
charge is purported to be taken over IP rights that cannot be identified
individually such as unregistered IPs. Unregistered IPs do not often make for
good security. Section 3 Trademarks Act (TA), Cap. T13, LFN 2004 for instance provides that no person
shall be entitled to institute any proceeding to prevent, or to recover damages
for the infringement of an unregistered trademark. However, this is different
in the case of copyright as a work, once created, becomes automatically copyrighted.
KEY
CONSIDERATIONS IN USING IP AS SECURITY
CONSIDERATIONS IN USING IP AS SECURITY
A would be lender
needs to conduct proper due diligence (DD) before deciding to accept the IP(s)
as security. The DD should address some key questions, including: Is the debtor
the legal owner of the relevant IP rights (as opposed to using them under a
licence from the owner)? What is the compliance status, have all the fees being
paid in respect of the registered IP in order to maintain their registrations?
Are the IP rights subject to any pre-existing mortgages or charges or any other
claims of any kind?
needs to conduct proper due diligence (DD) before deciding to accept the IP(s)
as security. The DD should address some key questions, including: Is the debtor
the legal owner of the relevant IP rights (as opposed to using them under a
licence from the owner)? What is the compliance status, have all the fees being
paid in respect of the registered IP in order to maintain their registrations?
Are the IP rights subject to any pre-existing mortgages or charges or any other
claims of any kind?
If subject to
expiration (like patents and trademarks), is the unexpired term (including
renewals if applicable), sufficient for the security transaction? IP rights in
themselves are never in perpetuity though some are subject to renewal. Section
23 TA, for instance provides that the registration of a trademark shall
be for a period of seven years, but may be renewed from time to time. Patents,
on the other hand have a limited term. Section 7 Patents and Design Act, Cap. P2,
LFN 2004 provides that the term of a patent shall be twenty years from
the filing date of the application. Schedule 1, Copyright Act, Cap. C28 LFN 2004
provides that for literary, musical or artistic works other than photographs,
the copyright subsists from the date of creation and expires seventy years after
the end of the year in which the author dies.
expiration (like patents and trademarks), is the unexpired term (including
renewals if applicable), sufficient for the security transaction? IP rights in
themselves are never in perpetuity though some are subject to renewal. Section
23 TA, for instance provides that the registration of a trademark shall
be for a period of seven years, but may be renewed from time to time. Patents,
on the other hand have a limited term. Section 7 Patents and Design Act, Cap. P2,
LFN 2004 provides that the term of a patent shall be twenty years from
the filing date of the application. Schedule 1, Copyright Act, Cap. C28 LFN 2004
provides that for literary, musical or artistic works other than photographs,
the copyright subsists from the date of creation and expires seventy years after
the end of the year in which the author dies.
There would also have
to be a systematic procedure as to which, the valuation of the IP -perhaps the
most important factor in using IP as security – would be conducted. Giving a
wrong valuation (over/ undervaluation) to an IP can have negative impacts on
the whole arrangement. Some of the key considerations in valuing an IP are
whether the IP is registered and in which countries; the competition threshold
(alternatives); how much income the IP has generated within the past few years,
the size and growth expectations of the markets for the inventions, etc.
to be a systematic procedure as to which, the valuation of the IP -perhaps the
most important factor in using IP as security – would be conducted. Giving a
wrong valuation (over/ undervaluation) to an IP can have negative impacts on
the whole arrangement. Some of the key considerations in valuing an IP are
whether the IP is registered and in which countries; the competition threshold
(alternatives); how much income the IP has generated within the past few years,
the size and growth expectations of the markets for the inventions, etc.
CHALLENGES
IN SECURITIZATION OF IP
IN SECURITIZATION OF IP
One of the key
challenges is IP valuation. Is it value in the near, medium and long term? What is the competitive landscape like, could
potential rival technologies emasculate the referenced IP? Another downside of
using IP as security collateral, particularly for trademarks, is that they are
often business-dependent, so that if a business fails, the value of the
trademarks that business uses may fall drastically.
challenges is IP valuation. Is it value in the near, medium and long term? What is the competitive landscape like, could
potential rival technologies emasculate the referenced IP? Another downside of
using IP as security collateral, particularly for trademarks, is that they are
often business-dependent, so that if a business fails, the value of the
trademarks that business uses may fall drastically.
There is also the
challenge of obsolescence or the current IP owner not fully developing the
potentials of its IP via updates. As new offerings enter the market, the value
of intellectual property associated with earlier products declines. This can
easily illustrated with the smart phone market where the leaders – Apple,
Samsung, etc. keep churning out products. Eastman Kodak paid dearly for
ignoring the potentials of digital photography, which it invented, ceding huge
market share and leadership to late entrants. This long-term trend can show why
the value of a patent associated with computer technology can significantly
decrease in a few years.
challenge of obsolescence or the current IP owner not fully developing the
potentials of its IP via updates. As new offerings enter the market, the value
of intellectual property associated with earlier products declines. This can
easily illustrated with the smart phone market where the leaders – Apple,
Samsung, etc. keep churning out products. Eastman Kodak paid dearly for
ignoring the potentials of digital photography, which it invented, ceding huge
market share and leadership to late entrants. This long-term trend can show why
the value of a patent associated with computer technology can significantly
decrease in a few years.
IS
NIGERIA LATE TO THE PARTY? – FOREIGN CONSIDERATIONS
NIGERIA LATE TO THE PARTY? – FOREIGN CONSIDERATIONS
IP asset-backed
securitizations are most common in the film and music industries. Some high
profile examples include the securitized royalty streams on the copyrights
owned by famous musicians. For example, in 1997, David Bowie issued 10-year
asset-backed bonds on the basis of future royalties on publishing rights and
master recordings from 25 pre-recorded albums, and raised US$55 million.
securitizations are most common in the film and music industries. Some high
profile examples include the securitized royalty streams on the copyrights
owned by famous musicians. For example, in 1997, David Bowie issued 10-year
asset-backed bonds on the basis of future royalties on publishing rights and
master recordings from 25 pre-recorded albums, and raised US$55 million.
In May 2017, Kenyan
President Uhuru Kenyatta signed into law a Bill allowing borrowers to use
intellectual property to secure commercial loans in a move aimed at boosting
access to credit. Kenya’s Movable Property Security Rights Act, 2017
paves the way for the formation of a centralised electronic registry for mobile
assets that financial institutions can use to verify the security offered. Nigeria
has a similar Act in the Secured Transactions in Movable Assets (STMA)
Act 2017 however it is restricted to the use of movable assets to
secure financing.
President Uhuru Kenyatta signed into law a Bill allowing borrowers to use
intellectual property to secure commercial loans in a move aimed at boosting
access to credit. Kenya’s Movable Property Security Rights Act, 2017
paves the way for the formation of a centralised electronic registry for mobile
assets that financial institutions can use to verify the security offered. Nigeria
has a similar Act in the Secured Transactions in Movable Assets (STMA)
Act 2017 however it is restricted to the use of movable assets to
secure financing.
In June 2016,
Singaporean shoe maker Masai borrowed
money using its IP as collateral, in the first loan of its kind to be approved
in Singapore. The country’s IP Financing
Scheme was introduced in 2014 to help companies use their IP to raise
capital. Under the Scheme, IP valuers approved by the Intellectual Property Office of Singapore determine the value of the
patent, and the Singaporean government partially underwrites the loans which
are granted by a financial institutions.
Singaporean shoe maker Masai borrowed
money using its IP as collateral, in the first loan of its kind to be approved
in Singapore. The country’s IP Financing
Scheme was introduced in 2014 to help companies use their IP to raise
capital. Under the Scheme, IP valuers approved by the Intellectual Property Office of Singapore determine the value of the
patent, and the Singaporean government partially underwrites the loans which
are granted by a financial institutions.
CONCLUSION
Securitizing IP in
Nigeria as a financing mode will remain a theoretical concept unless we make an
intentional towards actualizing it. As at date, there is no mention of creating
a charge over an IP on the website of the Trademarks, Patents and Designs
Registry – the office that should ‘theoretically’ receive charges that have
been created over IP. Lodging of the lender’s interest in the IP at the Patent
Office should protect it from third parties who either later acquire an
interest or who have earlier unrecorded interests in the IP in question.
Nigeria as a financing mode will remain a theoretical concept unless we make an
intentional towards actualizing it. As at date, there is no mention of creating
a charge over an IP on the website of the Trademarks, Patents and Designs
Registry – the office that should ‘theoretically’ receive charges that have
been created over IP. Lodging of the lender’s interest in the IP at the Patent
Office should protect it from third parties who either later acquire an
interest or who have earlier unrecorded interests in the IP in question.
The input of the
judiciary would also be necessary if we are to fully leverage securitization of
IP. Due to its intangible nature, its infringement may go on without the
knowledge of the alleged owner – but who upon becoming aware should be able to
bring a claim, and which should be decided timeously. Thus, the timely and
adequate intervention by our courts can protect the use of IP as security.
Where awareness is created by the judiciary being swift to act in cases of IP
breach, more people would begin to see the potential for securitization in IP.
judiciary would also be necessary if we are to fully leverage securitization of
IP. Due to its intangible nature, its infringement may go on without the
knowledge of the alleged owner – but who upon becoming aware should be able to
bring a claim, and which should be decided timeously. Thus, the timely and
adequate intervention by our courts can protect the use of IP as security.
Where awareness is created by the judiciary being swift to act in cases of IP
breach, more people would begin to see the potential for securitization in IP.
As a country, we
should make all necessary efforts in order to fully tap into the IP
securitization for the progress of the economy.
should make all necessary efforts in order to fully tap into the IP
securitization for the progress of the economy.
Franklin
Okeke
Okeke
LeLaw
Barristers & Solicitors
Barristers & Solicitors
‘Frank
is a corporate commercial lawyer with a deep bias for intellectual property and
real estate. His analytical mind and keen eye for details ensures that all his
clients are ably represented with bespoke solutions tailored to their specific
needs. He practices with LeLaw Barristers and Solicitors in the corporate
commercial department.’
is a corporate commercial lawyer with a deep bias for intellectual property and
real estate. His analytical mind and keen eye for details ensures that all his
clients are ably represented with bespoke solutions tailored to their specific
needs. He practices with LeLaw Barristers and Solicitors in the corporate
commercial department.’
Photo Credit – www.naij.ng