Bank on your IP for Credit

* "Bank on Your IP for Credit". Image Credit: Amanda JD Quest and AcroCreates. Copyright © 2022 Amanda JD Quest.

Over two decades ago, Mark Getty, the founder and Chairman of Getty Images, presciently observed that intellectual property (IP) was ‘the oil of the 21st century…[and]…the richest men a hundred years ago…all made their money extracting natural resources or moving the around… [whereas]…[a]ll today’s richest men have made their money out of intellectual property…’ Certainly in today’s global economy, IP assets are fast becoming some of the most lucrative assets that businesses can have on their balance sheets because of their tremendous potential for generating value. This is especially true for Micro, Small, and Medium-Sized Enterprises (MSMEs), which comprise approximately ninety per cent (90%) of businesses worldwide, and contribute to fifty per cent (50%) of the Gross Domestic Product (GDP) world-wide (The United Nations, 2022) but which, perhaps most importantly in the context of this discussion, typically experience considerable difficulty in securing credit because they usually do not possess (or otherwise have access to) the more traditional forms of collateral-- e.g. land, equipment or other machinery--that banks find attractive.

Due to the connections between IP and the commercial viability of MSMEs, there has in recent times been a discernible trend toward harnessing the untapped potential of IP assets to promote growth, innovation and increased competitiveness for MSMEs. One particularly significant means by which this is done is through the process of IP-backed financing. Simply put, IP-backed financing is an emerging area of finance that is concerned with unlocking the “hidden value” of IP assets such as patents, brands, software, trade secrets and copyrights. According to Forbes Magazine, there are ‘four (4) basic structures that [can] be used [by businesses] to monetize [their] intellectual property: IP-backed loans, IP sale-leaseback, IP legal finance, and IP royalty securitization’ (See Jason Jackson, “What Is Intellectual Property (IP) Financing And Why You Should Know”, Forbes, January 31, 2022. Accessible at: <What Is Intellectual Property (IP) Financing And Why You Should Know (forbes.com)> ). The first “basic structure” speaks to the process of IP Collateralization, which appears to be most popular amongst MSMEs. IP Collateralization entails the pledging by businesses of their IP assets as collateral to secure loans from banks. By leveraging their IP assets in this way, businesses can stimulate growth, innovation and increase their competitiveness in the market.

The ABCs of IP Collateralization

For IP assets to be collateralized, they must be monetized, and accurately valued. The monetization of IP assets involves “generating revenue or monetary value” from them. This is achieved by commercializing the IP assets. Monetizing IP assets require the execution of an effective IP monetization strategy. Any such strategy should enable businesses to sell their IP assets, legally enforce rights over their IP assets, license their IP assets, and sell products and services that are protected by their IP assets. According to Module 11 of the IP Panorama —a publication that was “designed to help SMEs utilize and manage IP in their business strategy”--IP valuation refers to the “process by which the monetary value of subject IP is determined.” Accurately valuing IP assets helps banks to better assess the risk involved in accepting the same as collateral thereby making it easier for MSMEs to effectively leverage those assets as collateral, and secure much needed credit to grow, innovate, and increase their competitiveness commercially. In the final analysis, however, the successful collateralization of IP assets will depend upon the existence of a “secondary market”, which can allow banks to quickly liquidate IP assets pledged by MSMEs as collateral in the event of any default on the loan.

IP Collateralization in Jamaica

Over the past nine (9) years, important steps have been taken by stakeholders legislatively and institutionally to facilitate the collateralization of IP assets by MSMEs, which currently account for approximately ninety-seven per cent (97%) of businesses in Jamaica. One of the most noteworthy developments in this area was the passage of the Security Interests in Personal Property Act 2013 (the SIPPA). The SIPPA expanded the range of property that could be used as collateral for loans to include movable personal property, like IP assets. These IP assets would now be registered in the NSIPP Registry which was established on January 1, 2014, and functions as the official repository for the registration of security interests in all personal property. The NSIPP Registry is administered by the Registrar of Companies, and all registrations are done electronically.

From an institutional standpoint, JIPO has been working to promote the collateralization of IP through various initiatives, including its recent launch of a collaborative project geared towards “strengthen[ing]…the Intellectual Property Ecosystem to increase innovation, competitiveness, and growth in Jamaica.” The “JIPO project” will support the incremental establishment of the appropriate frameworks to facilitate the acceptance of IP assets as loan collateral. Phase 1 of the JIPO project will focus on “IP monetization and capacity building to build a culture of IP monetization and to increase awareness of the benefits of IP Registration”. Phase 2 of the project will focus on the IP valuation framework, and phase 3 will focus on “designing and testing a financial product that will be able to work for [both] MSMEs and…financial institutions” (See Charlene, Henry, “JIPO Undertakes Project to Assist MSMEs”, JIS News, May 26, 2021. Available at: < JIPO Undertakes Project To Assist MSMEs – Jamaica Information Service (jis.gov.jm)>). In support of phase 1 of the project, JIPO trained about 340 individuals in IP valuation last year, and more recently partnered with the Jamaica Banker’s Association (JBA) on a pilot project intended to create an “IP collateral framework” that will enable the “island’s banks to leverage the earning potential of IP” (See Andrew Laidley, “JBA & JIPO partnering to create IP collateral framework “, Jamaica Observer, December 17 2021. Accessible at: <JBA & JIPO partnering to create IP collateral framework - Jamaica Observer>). According to JIPO, the plan is for companies to submit their loan applications to the banks by the end of this month, after which time their performance will be monitored. The JIPO project is scheduled to conclude in 2023 (See Alphea Sumner, “JIPO upbeat banks will accept IP as loan insurance", Jamaica Observer, November 15 2022. Available at: <JIPO upbeat banks will accept IP as loan insurance - Jamaica Observer>).

While some local banks do in fact accept IP assets as collateral (albeit on a small scale), IP collateralization has not yet been mainstreamed in secured lending locally. Indeed, at present only about one per cent (1%) of the assets registered in the NSIPP Registry constitute movable assets like IP. As such, MSMEs will necessarily continue to encounter difficulties in leveraging IP for the purpose of securing the credit they need to grow, innovate and increase their competitiveness. To address this issue, institutional actors and other relevant stakeholders should, among other things, move to establish—with reasonable alacrity—a framework that will promote and eventually mainstream the collateralization of IP in secured lending locally. At a minimum, this framework should include a mechanism through which IP can be properly valued since this is a central component of the IP collateralization process. Targeted efforts should also be made by the relevant stakeholders to strengthen JIPO’s capacity to promote the collateralization of IP in Jamaica by endowing it with the necessary human (in the form of valuation experts) and material resources to do that important work. Finally, the Jamaican Government and other key stakeholders within the private sector should consider incentivizing the acceptance by of IP assets as loan collateral through programs aimed at subsidizing the cost of IP valuation. (This is done in countries like Korea which boasts an impressive IP collateralization framework). Additionally, emphasis should be placed on absorbing even a fraction of the monetary risk borne by banks involved in IP-backed financing, which will also serve to encourage the participation of banks in the process of IP collateralization.

Since the MSME sector creates approximately eighty per cent (80%) of jobs within the Jamaican economy, thereby contributing greatly to the nation’s GDP, promoting and (eventually mainstreaming) the collateralization of IP in secured lending locally should be prioritized as an essential avenue for stimulating economic growth and ultimately making Vision 2030 a reality.