Further to the release of the Intellectual In the case of registered IP, statutory Property (IP) Hub Master Plan by the IP legislation in Singapore expressly Steering Committee in April 2013, Singapore provides that such IP rights constitute has announced the roll-out of a S$100 million personal property and that the same two-year Intellectual Property Financing may be assigned or charged by way of Scheme (the IP Financing Scheme) targeted at security.
IP-rich and asset-light companies in the
technology sector. The Trade Marks Act and Registered Designs Act provide that registered
Under the scheme, Singapore-incorporated trade marks and registered designs can companies may use their granted patents as be assigned by way of security, and that a security for loans from participating financial floating or fixed charge may be granted institutions. over these IP rights, while the Patents Act provides that any patent or
The Singapore government will partially application for a patent may be assigned underwrite such loans. or mortgaged under section 41(2).
This article will focus on the practical aspects Lenders may take security over relating to the taking of security over IP assets, registered IP through an assignment by particularly in the context of Singapore and the way of security (generally with a licence framework under the IP Financing Scheme. back to the chargor permitting its
continued use of the IP) or a fixed or
IP Financing floating charge.
Some general principles relating to the taking of Where the assignment relates to a security over IP rights are discussed below. pending application for registration, the
(1) Types of IP rights assignee steps into the shoes of the assignor, and acquires the rights and
IP rights may be classified into two broad benefits of the assignor as from the date types - registered IP and unregistered IP. of the assignment (and not from the date
of the application for registration).
Public registers exist in respect of certain
IP rights - in particular, patents, As registration of IP rights applies in each
trademarks and registered designs. case for specific periods of time, the
security should include covenants on the
In Singapore, these IP rights are part of the chargor to maintain registered with the Intellectual Property registration, to pay all necessary fees and Office of Singapore (IPOS). not to act in a manner which may
prejudice the registration.
In contrast, there are no public registers
which record other types of IP rights, In addition, the chargor should be such as copyright and trade secrets. required to take action to protect the IP
rights and to pursue infringers where
The registrability of IP rights impacts appropriate. upon a lender’s ability to conduct due
diligence on such IP as well as the In contrast, where a lender takes a legal
manner of taking security over such IP. mortgage over registered IP, it will
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necessarily bear primary responsibility for maintenance and protection of such IP rights.
In such event, the security should expressly permit the lender to recover the costs of such maintenance and protection from the mortgagor.
In the case of unregistered IP of little commercial value, the lender may be content to rely upon a general floating charge within its debenture security.
It should however be noted that a floating charge may be unsatisfactory as a method of taking security over unregistered IP, as it would potentially allow borrowers to sell off commercially valuable IP before the charge crystallises.
As such, if the IP is of particular value, the lender should consider taking security by an assignment by way of legal mortgage over such IP.
To permit the mortgagor to continue to use the rights, the lender will generally grant back to the mortgagor an exclusive, royalty-free licence.
Where the IP generates recurring royalty payment streams through licensing agreements to third party licensees, lenders may also take security over these royalty payment streams.
IP royalty financing allows the owner of the IP to retain an equity interest in the IP, enabling the owner to still profit from the upside value of the IP beyond the security interest on the debt.
(3) Due diligence on IP rights
As with any asset offered as security, lenders will need to conduct due diligence on IP offered as collateral.
In the case of registered IP, the registers administrated by IPOS contain publicly available information on the scope, duration and ownership of the IP rights, enabling lenders to easily verify these details.
Assignments and mortgages of these IP rights may also be recorded on the register and lenders may thereby obtain information about these.
It should be noted that registration of such transactions is not compulsory and does not per se affect the validity of the transaction as between the parties thereto.
However, until an application has been made for the registration of such transaction, the transaction is ineffective as against a third party acquiring a conflicting interest in or under the registered IP right in ignorance of the transaction, and the assignee is not entitled to claim for damages.
The lender should therefore confirm that there is no earlier security interests registered against the IP over which security is to be granted, or any licences (particularly exclusive licences) which would significantly impact the resale value of the IP in the event of realisation of the lender’s security.
In contrast, the due diligence that can be carried out in respect of unregistered IP
register against which information
To the extent that unregistered IP forms an important part of a borrower’s
However at the very least it should be confirmed that the borrower is the legal owner of the rights in question.
Procedural requirements and perfection of security
When taking security over IP rights, lenders should also be cognizant of the procedural and perfection requirements which apply in relation to such security.
(a) Security to be in writing and signed by assignor/mortgagor
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The Patents Act provides that an assignment or mortgage of a patent or an application for a patent shall be void unless it is in writing and is signed by or on behalf of the assignor or mortgagor.
An assignment failing to meet the requirements of section 41 may nevertheless be effective in equity but will of course be subject to being defeated by a bona fide legal assignee for value and without notice of the prior equitable interest.
The Trade Marks Act and Registered Designs Act provide that an assignment by way of security of a trade mark or registered design shall not be effective unless it is in writing and is signed by or on behalf of the assignor or mortgagor.
Where the assignor is a body corporate, the seal of such body corporate should be affixed to the security document.
(b) Notification on the relevant IPOS register
Lenders should ensure that their security interest over registered IP is notified on the relevant registers maintained with IPOS.
Registration serves as notification to third parties of the lenders’ security interest and a failure to register may result in such security interest being defeated by later conflicting interests which were entered into with no notice of the earlier transaction.
Although it may well be possible for a lender to take security over an unregistered trade mark, the lender should ensure that any marks of commercial value are duly registered by the owner as a condition to the grant of its loan
facilities, in order for the lender to effectively protect its own interest by registration.
(c) Filing of charge under section 131 of the Companies Act
Section 131 of the Companies Act mandates that where a company creates a charge over certain classes of assets, it shall lodge with the Registrar a statement containing the particulars of such charge under section 131(1).
In particular, a company will be required to lodge statements in relation to a floating charge created on the undertaking or property of the company under section 131(3)(g) and a charge created on a patent or licence under a patent, on a trade mark, or on a copyright or a licence under a copyright under section 131(3)(j).
Recommendations of the Steering Committee and the IP Financing Scheme in Singapore
The IP Financing Scheme was implemented pursuant to the Steering Committee’s recommendation, to encourage the creation of IP-backed loans, one of the classes of IP financing identified by the Steering Committee.
Classes of IP financing identified by the Steering Committee
The Steering Committee identified three broad classes of IP financing in the IP Hub Master Plan:
IP funds - Strategic investment by venture capital and private equity funds in IP assets, such as the purchase of patent titles to gain profits from their sale and licensing, and direct investments in targeted IP-rich companies or portfolios.
IP-backed loans - Loans which are partially or wholly secured by the borrower’s IP assets as collateral.
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(c) IP securitisation - The transfer of IP assets to a bankruptcy-remote special purpose vehicle, which can then raise funds through the issuance of securities backed by such IP assets.
The Steering Committee was of the view that financing of “early stage IP” (IP in the early stages of development) should primarily be left to IP funds to more sophisticated investors, due to the higher risk profile at this stage.
In contrast, banks are in a position to play a greater role in the financing of more mature and proven IP where the risks are more defined and can be better managed, through IP- backed loans and IP securitisation.
To encourage the creation of IP-backed loans, the Steering Committee recommended that an IP financing scheme be introduced, where the government partially underwrites the value of IP as collateral.
(2) IP Financing Scheme
Under the IP Financing Scheme, Singapore-incorporated companies may use their granted patents as collateral to secure loans from the participating financial institutions (currently DBS Bank Ltd, United Overseas Bank Limited, and Oversea-Chinese Banking Corporation Limited).
The prospective borrower must first approach any of the participating financial institutions for a preliminary credit assessment.
The borrower will then need to appoint an IP valuer from a panel of approved valuers to determine the value of the granted patent(s). Valuation will generally take approximately one month.
Finally, the borrower will need to submit a formal application for the loan to the relevant participating financial institution, together with the valuation report for the granted patent(s).
The valuation report must be submitted within four weeks from the date thereof.
IPOS will also provide a valuation subsidy to successful applicants, in an amount equivalent to the lowest of (i) 50% of the IP valuation cost, (ii) 2% of the value of the IP and (iii) S$25,000.00.
To be eligible for the subsidy, the applicant must have drawn down on 100% of the approved loan.
It should be noted that the IP Financing Scheme does not extend to all types of IP financing nor to all types of IP rights as collateral.
The scheme is limited only to loans granted by the participating financial institutions to Singapore-incorporated borrowers, where registered patents are offered as collateral.
Lenders’ concerns relating to the taking of security over IP rights.
While the implementation of the IP Financing Scheme does not prevent lenders from taking other types of IP besides granted patents as collateral for their loans, the Steering Committee noted that IP financing is still not widely accepted by financial institutions, due to certain key concerns in relation to the taking of security over IP rights.
These concerns and the recommendations of the Steering Committee to address them are briefly discussed below.
Concern with the availability of marketplace avenues to liquidate IP assets.
The Steering Committee recommended that the Government work to develop a vibrant IP marketplace, by supporting and co-funding a diverse range of marketplace avenues across the entire marketplace, thus giving financial institutions many avenues to liquidate IP assets.
Lack of confidence in the valuation of IP assets
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The Steering Committee through the establishment of a recommended that a Centre of panel of top international Excellence for IP Valuation be set arbitrators in Singapore.
up to raise competency of IP
valuation within the industry and (e) Concern with market transparency
ensure a minimum standard of
proficiency in IP valuation services. The Steering Committee recommended that the Singapore
It should be noted that the IP Exchange encourage listed Financing Scheme also addresses companies to disclose their IP this issue by mandating that rights.
borrowers appoint an IP valuer
from a panel of approved valuers. A clear and structured disclosure of IP rights of material importance
Concern with the volatility of IP can provide investors with better
asset values, in particular, patents, insights into the company’s
due to potential disruptive strengths and potential growth.
technologies and changes in
applicable laws with regard to Conclusion
In the increasingly knowledge-based global The Steering Committee economy of today, IP assets and IP-related recommended that the transactions are likely to become an increasing Government work with the commercial importance to companies and industry to encourage positive financial institutions alike.
practices that would encourage the
transparency of IP transactions, The Steering Committee’s recommendations including the recordal of IP and the implementation of the IP Financing transactions with IPOS and the Scheme provide a good starting point for disclosure of information related to borrowers and lenders to increase their IP assets by listed companies, familiarity and comfort with IP as a form of providing investors with more collateral.
information on IP assets held by
companies. Rodyk acted for IPOS in relation to the IP
Concern with the need for Financing scheme through which IPOS enforcement and litigation to supports the banks which provide the IP preserve the value of IP assets financing to companies and businesses which
use their IP as collateral.
The Steering Committee
recommended that Singapore be Rodyk was involved in preparing all three
developed and marketed as one of agreements with the participating financial
the world’s leading IP dispute institutions as well as in the negotiations with
resolution centres, by enhancing financial institutions.
the profile of Singapore’s existing IP
court and increasing alternative Intellectual property & technology partner
dispute resolution avenues for the Yew Woon Chooi led, supported by senior
resolution of IP-related disputes, associate Elvin Yeo.
The authors acknowledge and thank Yew Woon Chooi for her contribution in the writing of this article.
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