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Using IP as Collateral

Presented by Michael Doyle, October 21, 2003, 13th APAA General Assembly, Kota Kinabalu, Sabah, Malaysia

© Seri Manop & Doyle

Earlier this year, the Thailand government announced its plans to promote a new and progressive policy concerning IP rights.

The government intends to assist Thailand SME's gain more access to funds by encouraging Thailand banks to accept IP rights as collateral for loans.

Thailand's Initiative on using IP as collateral

This is interesting, from a regional standpoint, because if the government is successful with this initiative, Thailand may serve as a model for other countries in Southeast Asia interested in assisting their SME's in this manner.

Using IP rights as collateral seems like novel concept, but it should not be.

In merger and acquisition situations, parties commonly assign monetary values for IP rights. Using IP rights as loan collateral is only an extension of this idea.

There are, however, significant obstacles to banks utilizing this financing structure on a broad scale. These include finding

an appropriate means of valuation of IP and
ways to clearly forth the Bank's rights upon default.

How the government addresses these issues will to a large extent dictate whether this new policy will be successful.

Below we briefly examine the above issues and highlight a few of the ways the Thailand government plans to address them.

1. Valuation

Valuation of IP rights is many times a difficult issue- regardless of the context.

The value of IP is the most clear when the proprietor can point to a clear revenue stream generated by the IP (licensing fees, royalties, etc.) over time.

For many SMEs, unfortunately, the value of IP rights is much more difficult to demonstrate. This is because SME's may be more likely to generate revenue from its IP, indirectly, through things like good will in the market, rather than, directly, thru its receipt of licensing fees and royalties.

To assist Banks in properly evaluating IP rights, the Thailand Department of Intellectual Property (DIP) is drafting a guide for IP valuation. The guide will be divided into four categories: definition of IP, types and qualifications of IP, method of assessing IP and guidelines for credit officers.

The next scheduled step in the production of the guide will be for Thailand banks to enter into a Memorandum of Understanding with the DIP setting forth the points to be addressed.

2. Rights Upon Default

Even after the Banks are convinced that the IP offered by the Borrower is valuable, the Banks will still not enter into this arrangement typically unless they are satisfied that their rights to the IP, upon default, are secure.

As IP ownership rights are not a tangible asset, Banks may feel that their rights upon default are less secure than they would be if the collateral was a tangible asset such as real estate.

One method available for Banks to clarify these rights is by contract. The Banks can set forth language in the loan agreement stating that upon the Borrower's default on the loan the Bank would be free to sell the IP to interested third parties (with the help of DIP).

Another issue is the proper way to define the Borrower's ownership rights if the IP has not been registered ownership with the government.

Owners in Thailand may maintain rights to specific types of IP, even if those rights have not been registered. The net effective is that sometimes a proprietor has ownership rights to IP even though he has no certificate of ownership.

This is a potential problem because if the IP owner does not posses a certificate of ownership this may cause the Bank to be skeptical as to the owner's actual rights to the IP and reject the loan application on that basis.

An example of this would be ownership of a Trade Secret. Thai law does not require the owner of the Trade Secret to register his rights with the DIP in order for his rights to be effective under the law.

If, however, the owner does not have this documentation the Bank may refuse to approve the loan.

In order to assist, the DIP has stated that it is available to confirm the owner's rights to IP in certain situations. Upon the owner satisfactorily demonstrating his rights to the IP, the DIP will issue a special ownership certificate acknowledging those rights.

Using the above example, that would mean that the owner may obtain a certificate of ownership to the Trade Secret even though, his rights have not been registered and then, in turn, use that Certificate as a part of his loan application.