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 100 years ago…all made their money extracting natural resources or moving them 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 21st century businesses can have on their balance sheets due to their tremendous potential for generating value. This is especially true for micro, small, and medium-sized enterprises (MSMEs), which comprise approximately 90 per cent of businesses worldwide, and contribute to 50 per cent of the gross domestic product (GDP) worldwide (The United Nations, 2022), but which, perhaps most importantly in the context of this discussion, typically experience considerable difficulty in securing credit because they might not own the more traditional forms of collateral (for example, land, equipment, or other machinery) that banks find most attractive.

Due to the connections between IP and the commercial viability of MSMEs in particular, there has in recent times been a discernible trend towards harnessing the untapped potential of IP assets to promote growth, innovation, and increased competitiveness. One particularly significant means by which this is done is through the process of IP-backed financing. In essence, IP-backed financing is an emerging area of finance that is concerned with unlocking the “hidden value” of intangible assets like IP assets such as patents, brands, software, trade secrets, and copyrights.

According to Forbes magazine, there are four basic structures that can be used by businesses to monetise their intellectual property: IP-backed loans, IP sale-leaseback, IP legal finance, and IP royalty securitisation. See Jason Jackson, ‘What Is Intellectual Property (IP) Financing And Why You Should Know’, January 31, 2022.

The first basic structure speaks to the process of IP collateralisation, which appears to be most popular amongst MSMEs. IP collateralisation entails the pledging by businesses of their IP assets, among them patents, registered trademarks, and copyrights, 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.

ABCs OF IP COLLATERALISATION

For IP assets to be collateralised they must be monetised and accurately valued. The monetisation of IP assets involves generating revenue or monetary value from them, which is achieved through commercialising the IP assets. Monetising IP assets will require the execution of an effective IP monetisation strategy which 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 utilise 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 collateralisation 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 collateralisation in Jamaica

Over the past nine years important steps have been taken by stakeholders, legislatively and institutionally, to facilitate the collateralisation of IP assets by MSMEs, which currently account for approximately 97 per cent of businesses in Jamaica. A noteworthy development 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. Such IP assets would be registered in the NSIPP Registry which functions as the official repository for the registration of security interests in all personal property, and is administered by the registrar of companies. The NSIPP Registry was established on January 1, 2014. All registrations in the NSIPP Registry are done electronically.

From an institutional standpoint, Jamaica Intellectual Property Office (JIPO) has been working to promote the collateralisation of IP through various initiatives, including its recent launch of a collaborative project to “strengthen…the Intellectual Property Ecosystem to increase innovation, competitiveness, and growth in Jamaica”. The JIPO project will support the incremental establishment of the appropriate framework to facilitate the acceptance of IP assets as loan collateral. Phase 1 will focus on “IP monetization and capacity building to build a culture of IP monetisation and to increase awareness of the benefits of IP registration”. Phase 2 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” (‘JIPO undertakes project to assist MSMEs’, JIS News, May 26 2021′).

In support of Phase 1 of the project JIPO trained about 340 individuals in IP valuation and more recently partnered with the Jamaica Bankers’ 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” (‘JBA & JIPO partnering to create IP collateral framework’, Jamaica Observer, December 17 2021). According to JIPO, the plan is for companies to submit their loan applications to the banks, after which time their performance will be monitored. The JIPO project is scheduled to conclude in this year.

While some local banks do accept IP assets as collateral, albeit on a small scale, IP collateralisation has not yet been mainstreamed in secured lending locally. Indeed, at present only about one per cent of the assets registered in the NSIPP Registry constitute movable assets like IP. As such, MSMEs continue to encounter difficulties in leveraging their IP assets 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 a framework that will promote and eventually mainstream the collateralisation 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 ventral component of the collateralisation process. Targeted efforts should also be made by the relevant stakeholders to strengthen JIPO’s capacity to promote the collateralisation of IP in Jamaica by endowing it with the necessary valuation experts and material resources to do that important work. Finally, the Jamaican Government and other key stakeholders within the private sector should consider incentivising the acceptance by of IP assets as loan collateral through programmes aimed at subsidising the cost of IP valuation. This is done in countries like Korea, which boasts an impressive IP collateralisation 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 their participation in the process.

The MSME sector creates approximately 80 per cent of jobs within the Jamaican economy, thereby contributing greatly to the nation’s GDP. Promoting and eventually mainstreaming the collateralisation of IP in secured lending locally should therefore be prioritised as an essential avenue for stimulating economic growth and making Vision 2030 an eventual reality.

Amanda Quest is an attorney-at-law.