Intellectual Property Securitization: Intellectual Property Securities

By Marc René Deschenaux

"Intellectual Property Securitization" introduces author Marc René Deschenaux's creation of Intellectual Property Securities (IPSs). Not only does an IPS allow you to invest selectively in one project, but it accomplishes this without diluting equity or adding debt to the balance sheet of the issuer, whether a physical person or a company.

Imagine the possibility of investing selectively in one aspect of a company, such as a single movie, song, book, patent, technology, or design you truly believe in. Picture the separation of the investment from the corporation and its human errors, like poor management or excessive spending.

Intellectual property (IP) as a commodity is becoming increasingly important in today's global economy. With this exciting book, you can dive into the world of securitization and intellectual property rights! Marc René Deschenaux provides invaluable information on the risks, advantages, and legal aspects of the securitization process as a whole, pointing to specific features of IPS.

IPSs reduce the costs of transfer of intellectual property to a fraction of their regular costs. They ensure that if you transfer a certain technology, all patents, trademarks, and other relevant intellectual properties thereto pertaining are included in said transfer.

Finally, under many jurisdictions, IPSs allow the investor to invest directly into science through patents or into arts through copyrights, authoring, and neighboring rights; because of this, investment is tax free!

All books are also available in audiobook format.

• Language: English
• Publisher: BookBaby
• Release date: Feb 2, 2022
• ISBN: 9781737567226

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1. Introduction

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While it might appear to be somewhat incongruous with the conventional investment wisdom that tends to characterize the financial markets, it should be understood that companies with little or no tangible assets can actually raise substantial funds without giving up a sizeable percentage of their ownership in the underlying corporate entity.

How could this seemingly incongruous reality be possible? To answer this critical question, we must conduct an assessment of the highly innovative strategies that involve the sale of security interests in intangible assets that are categorized as intellectual property (which specifically includes copyrights, trademarks, and patents).

In terms of its relative importance within the modern economy, the prominence of intellectual property (IP) as a valuable global commodity has risen quite quickly in recent years. So while the protection of tangible assets will continue to play a vital role in the overall strength outlined on the balance sheet of any business, the enhanced levels of return that corporations can derive from intangible assets are also worthy of high praise.

Here, it should be noted that several types of intellectual property exist within the context of this newly emerging global economy. Key examples might include trademarks, copyrights, and patents associated with the operations of a business. By extension, strategies devoted to IP protection now cover the majority of the world’s hi-tech gadgets, consumer technologies, and corporate brands.

Although intellectual property is not a tangible commodity in the conventional sense, it is an asset, and as such, companies can obtain financing by using IP as collateral. But since these assets are intangible, even the most knowledgeable investment analysts can face significant difficulties when attempting to value the potential returns that intellectual property assets might be capable of generating in the future.

This method of transforming an asset (or a pipeline of cash flows) into a set of marketable shares is referred to as securitization, which is a concept that’s relatively well-known in the financial industry but still exists as a novelty when it comes to public’s perceptions with respect to the use of intellectual property in global markets.1

What is Securitization?

Achieving a better understanding of IP securitization strategies generally requires a firm grasp on the concepts of market securitization, and this is why it is critically important to discuss these topics in greater detail. Unfortunately, there is often a significant amount of confusion surrounding the precise definition of the word securitization as a term within the global financial lexicon, so this is where we will begin:

Securitization is the process by which a right is integrated to a support so that said right can automatically be transferred of ownership and/or benefit and/or possession by the assignment of said support to a new holder.

Additionally, a highly relevant report that was published by the International Monetary Fund (IMF) defines the far-reaching concepts of securitization as follows:

"Securitization is the process in which certain types of assets are pooled so that they can be repackaged into interest-bearing securities. The interest and principal payments from the assets are passed through to the purchasers of the securities.

Until now, the processes of securitization have generally been used as collateral to secure interest-bearing securities. Essentially, securitization is the mechanism that an asset’s owner (originator) uses to offer the asset to a special purpose vehicle/entity (SPV) created solely for this purpose. Once this occurs, the SPV then produces marketable securities that are secured by these assets, and sells them to financial market participants as asset-backed securities (ABS).

Revenues from the buyers’ purchases of the ABS are also utilized by SPVs to compensate the originator. As a result of all of these efforts, an illiquid commodity held by the originator can be turned into a marketable asset via securitization and it should be relatively clear that the primary goal of securitization is to improve liquidity in the market against illiquid assets.

Here, please note that using an asset as backing a securities issue is not directly securitizing the asset, but securitizing a secured debt. In all of these ways, securities that are backed by high-value assets are formed with the help of securitization but it is important to have a full understanding of these distinctions before engaging in any of these practices. 

Of course, only tangible or real assets such as property or land might have been used in the past to back these types of securities. However, in today’s dynamic markets, IP assets are also used to back securities and these emerging trends have opened up new doors of opportunity for corporations around the world. In the following chapters, we will take a look at some of the best strategies that can be used to capitalize on these trends and to secure

What is Intellectual Property (IP) Securitization?

Since assets derived from intellectual property rights are often used for financing purposes, corporations with a strategic advantage must be aware of the fact that these IPs can be securitized when they have the potential to generate future receivables, such as possible royalty payments. Ultimately, the securitization of IP assets follows a mechanism that is similar to the securitization of every other asset (or asset-backed security).2

First, there is an asset owner (originator) ready to invest in businesses in order to gain future revenue rights that are based on a corporation’s intellectual property assets. Future sources of revenue might include sales of goods that are covered by one of the definitions of intellectual property law, as well as royalties earned by selling, licensing or pledging intellectual property rights.

Within the realm of patents and copyrights, corporate income can be generated from licensing any form of security or by selling the underlying assets that the intellectual property right protects. In these ways, the originator would transfer the rights to potential cash flows from the underlying properties to a securities issue.

In practice, this could be conducted either through direct securitization or via an entity such as a special purpose fund in the case of indirect securitization (which is much like every other form of asset-backed security). After that, the special purpose fund would issue securities that are backed by future income sources in order to enhance operational performances.

One this occurs, investors would invest in the securities that have been generated and this enables the special purpose fund and/or the originator to recover their investment and earn a profit, or not (depending on valuation). Income sources received from the underlying security could then be used to pay the people who invested in the securities.

Within this dynamic arrangement, the special purpose vehicle requires a servicer who can receive money from the revenue source and deposit it into the special purpose vehicle. Furthermore, the servicer is responsible for covering the initial costs associated with operating the special purpose fund (as well as the securities issued).

In most cases, the servicer would deduct these expenses from the income stream produced by the underlying properties but it is also important to remember that the cost of having these securities rated by a credit firm is one of the charges that the servicer would deduct. When factoring in all of the possible expenses that might be incurred during the process, it is possible to maximize the potential for profitability over time.

Additionally, credit ratings for intellectual property-backed securities are often needed so that ordinary people with limited knowledge of IP securities can recognize the risk factors associated with the security when determining whether or not to invest.

Of course, credit rating firms cannot measure intellectual property-backed assets in the same way as other assets and must devise a unique approach to rate them accurately. For example, when rating intellectual property-backed securities, Moody’s Investor Service generally considers how the technical market is evolving in relation to the assets in the pool, how rapidly the technology will become outdated, which brands are included in the portfolio, and so on.

Overall, this approach demonstrates the various ways in which credit rating agencies must understand not just the pool of assets but also the changing world around them and the broader impact these events will have on global financial markets.

Why is Intellectual Property Securitization the Future of Securitization?

In the early 1980s, asset securitization began with the securitization of credit card receivables and auto loans. It has since expanded to include a wide variety of assets, ranging from auto loans to restaurant sales and these expansions have only served to increase the number of opportunities that are currently available in the market.

As companies’ emphasis begins to shift toward creating intellectual property, obtaining financing via intellectual property has the potential to become much more common in the future. Essentially, there are many arguments in favor of using intellectual property as collateral. However, these are generally the most important reasons for securitizing assets:

In the following sections, readers can discover a more in-depth explanation of why these reasons are critically important for anyone interested in the process of securitizing intellectual property (IP).

Intellectual Property is an Underutilized Collateral Source

According to a number of reports, the role and impact of intellectual property is growing in the US and global economy. For example, the value of intangible assets as a proportion of US company market capitalization rose from 20 percent in 1978 to 73 percent in 1998. Overall, this shows us that US firms’ proportion of intangible assets to tangible assets has gradually increased over time.3

Therefore, a corporation that primarily uses tangible assets for asset-backed funding has a significantly lower asset base than one that uses intangible assets such as IP in the form of trademarks, patents, and other forms of intellectual property. Companies are able to access new streams of financing, and at better rates, by having those additional assets as security, so this is one strategic aspect that businesses in all industries should be considering.

Securitization of IP Provides a Quick Return on Investment in R&D

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In industries with few tangible properties, the opportunity to convert R&D innovations into assets such as copyrights, trademarks, and patents that can be presented as collateral to lenders is critical. Major technology firms spend billions in research and development (‘R&D’) expenses per patent awarded each year.

Patent portfolio securitization offers these firms an alternative method of financing R&D expenses. Firms can easily finance further R&D by quickly realizing a return on R&D dollars by securitizing revenue sources.

Securitization of Intellectual Property Generates Added Value

Intellectual property valuation is notoriously complex. By securitizing IP, a minimum known value may be assigned to these properties, which could be higher than commonly assumed. Corporations who already assign significant value toIP assets in their financial reports may provide added justification for the valuation by showing that the secondary market is likely to assign a comparable value to the IP.

The aim of this book is to encourage potential Intellectual Property (IP) securitization as a viable mode of funding innovative industries that need immediate capital to work, produce goods, and expand their business. The recommended strategy is my commitment to accelerating alternative funding sources of financing for the creative industries in order to improve and grow innovation and productivity.

Imagine having the ability to invest selectively in one movie, one patent, one song, one book, one design you truly believe in. Imagine not having to worry about things like poor management or excessive spending— wouldn’t that be great? Well, that is now possible with Intellectual Property Securities (or IPS).

Through this book, I will help you master intellectual property securitization & securities by covering:

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2. Securitizable Intellectual Products

Since its emergence in the mid-1990s, IP securitization has taken several different forms (music royalties, future video, and trademark license receivable transactions are examples of this type of activity). Essentially, the sale of IP by a holder for securitization and the receiving of funds from investors in the form of lump-sum payments constitute IP-backed securitization.

IP products can be monetized to provide the owners with a combination of funding and economic benefits. Intellectual property may be sold, licensed, used as insurance, or turned into securities. Ultimately, this is why IP should be classified as a capital asset (just like other valuable assets) because its holders can achieve stable streams of cash flow in the future.

Securitization can be used to build resources and financial instruments for IPs as a cash flow producing asset. Securitization has grown in popularity as a means of raising funds and obtaining liquidity in exchange for the transferring of specific assets. Though asset securitization is not a recent concept, IP securitization has been a game-changing tool for monetizing IP ever since David Bowie’s music archive was turned into sellable bonds in 1997.4

Interestingly, the performance of Bowie Bonds demonstrates that IP owners can benefit financially from IP securitization. In principle, securitizing IP is the same as securitizing any other asset; however, securitizing IP poses a variety of difficulties and issues in practice. It’s been over twenty years since the first-ever music royalties future receivable securitization, popularly known as Bowie bonds, paved the way for IP securitization as a financing tool.

Since the launch of the Bowie bonds, much has been published in the corporate and legal literature, as well as scholarly journals, about the securitization of numerous IP portfolios, ranging from copyrights (especially those related to film and music) and patents (especially those related to advanced tech and pharmaceuticals) to domain names, trade secrets, and trademarks.

On investigation, we find that between 1999 and 2002, the number of publications on IP securitization peaked. Since then, fewer papers have been written on the topic and the number and variety of deals recorded have not increased significantly or as anticipated. The obvious follow-up question is this: Where did all the enthusiasm go? Maybe the financial correction that followed the dot.com bust took securitization off-guard. Or maybe risk management of intellectual property securitization is still in its infancy and it will take time for it to get to the expected boom.

Whatever the reason for the loss of excitement in and slow growth of IP securitization might be, one thing is for sure—there is a new wave of excitement around the topic of intellectual property securitization & securities with an increasing number of people wanting to know more about not just securitizable intellectual products but also how the process of securitization works and the key players involved. But before we dive deeper into securitizable intellectual products, let me walk you through the process of securitization and its key participants.

2.1 How the Securitization Process Works

Traditional financial asset securitization deals have existed since at least the 1980s. Prior to the Bowie bonds, most assets that were securitized were tangible receivables like property leases, procurement contracts, and similar items. Credit rating companies are well aware of the uncertainties involved with tangible receivables and their predictable sources of revenue. License fees or other predictable cash flows from intellectual property can be the receivables in the case of IP rights.

The originator, or holder of the receivables, pools them together and passes them to a special-purpose vehicle (SPV) created solely for the purpose of serving as securities issuer based on the receivables. The SPV raises funds by selling debt or shares to investors, with the revenues going to the originator. The receivables serve the SPV’s debt (bonds and the like); equity interests provided by the SPV lead to the SPV flowing through the proceeds generated by the receivables.

The obligation to pay the receivables is secured by recording the security rights in the asset, with the option to seize the asset in the case of a default. Regardless of the type of security issued by the SPV, the aim is to set the securitized asset apart from the originator’s assets such that it is not included in the originator’s estate in the case later becomes bankrupt.

The bankruptcy court will examine the originator’s trade with the SPV to ensure that it is a genuine sale rather than just a loan. The actual asset transfer to the autonomous SPV, therefore, distinguishes the originator’s resources in such a manner that the latter’s credit rating is not deemed a risk factor that outweighs the creditworthiness of the SPV’s securities. The hazards in a securitization deal are primarily evident in the world of tangible assets. Consider, for instance, the securitization of a real estate lease portfolio.

In this case, a landlord (the originator) passes its lessees’ rent commitments to a trust (the SPV) over a ten-year term in return for a lump-sum payment. The two most significant threats in this type of hypothetical situation are reasonably obvious and can be compensated for or mitigated to some extent:

While this tangible example, like the real world, does not have a flawless revenue stream, it is a relatively stable stream with a fairly reliable credit rating based on previous experience with comparable leases or the property’s past. The concept behind securitization is that the risk of many assets defaulting is smaller than the risk of a single asset defaulting. With securitization, it is assumed that the default likelihood of various assets is distributed independently.

In its most simple form, the procedure consists of two steps. The first phase involves a corporation with loans or other income-producing properties—the originator. The originator identifies the assets it needs to withdraw from the balance sheet and pools them into a reference portfolio. It then transfers this asset pool to an issuer—a special purpose vehicle (SPV)—a financial and legal agency created solely to buy assets and realize the potential for off-balance-sheet valuation.

Next, the issuer funds the purchase of the consolidated assets in phase two by selling tradable, interest-bearing shares to stock market buyers. The owners collect fixed or variable rate dividends from a trustee account financed by the reference portfolio’s cash flows. In most instances, the originator services the portfolio’s debts and receives deposits from the initial creditors before sending them back to the SPV or trustee (minus a servicing fee).

In general, securitization is a varied and alternate source of financing that involves the transition of credit risk (as well as potentially currency risk and interest rates) from issuers to investors. In a more recent modification, the reference portfolio is split into multiple slices, referred to as tranches, each with a unique degree of risk and sold individually. The ROI (repayment of principal and interest), as well as losses, are distributed among the different tranches based on their seniority.

For instance, the lowest risk tranche has first pass on the income created by the underlying properties, while the riskiest has last call. three-tier defense design—senior, mezzanine, and junior tranches—is the standard securitization system. This arrangement centers potential portfolio losses in the junior or first loss tranche, which is typically