IP Securitization, a financial practice that includes transforming future income streams generated by intellectual property (IP) assets into tradable securities, has seen tremendous expansion and innovation over the years. David Bowie pioneered this breakthrough concept in 1997, when he securitized the future royalties from his 25 most popular albums, raising an astonishing $55 million in the process. This trailblazing move paved the way for other major corporations to follow suit, including Coca-Cola, which securitized future royalties from its esteemed brand name in 2001, raising an unprecedented $1.5 billion and setting a record for the largest IP securitization at the time.
The Walt Disney Company entered the ranks of IP securitizers in 2007, raising $1.7 billion by leveraging future payments from its large library of animated films. Even Domino's Pizza recognized the worth of its trademark rights, securitizing them and raising $250 million in 2008. Royalty Pharma, a business specializing in pharmaceutical patent securitizations with a track record of over $10 billion in pharmaceutical patent securitizations, is another important participant in this arena. This introduction delves into the fascinating realm of IP securitization, providing light on its evolution and spotlighting some of its most extraordinary examples.
IP securitization is a financial technique in which an IP holder, whether a corporation or an individual, puts their intellectual property assets into a structured financial instrument known as "IP-backed security" or "IP bond." These securities help in indicating ownership thus generating cash flows created by the underlying IP's exploitation. The IP holder then sells these securities to investors, thereby passing the IP's risk and possible rewards to the buyers.
IP assets can be used as collateral to produce securities that can be bought and sold on the financial markets, which is how IP and securitization are related. IP owners can profit from their intangible assets through securitization, and investors can purchase IP-backed securities. IP securitization, a revolutionary financial strategy, has evolved, allowing organizations to transform their IP portfolios into tradable securities. The idea of IP securitization is explored in this article, as well as its advantages and potential effects on businesses and investors.
Let us consider Jaya to be a popular musician who has written and released multiple hit songs. She earns royalties every time her songs are broadcast on the radio, streamed online, or used in ads. Jaya makes the decision to securitize her music royalties in order to raise funds for her future album and other ventures. This is how the procedure works:
Valuation: The intellectual property assets are thoroughly evaluated to determine their current and possible future value. This involves an examination of the IP's market position, competitive advantages, and revenue-generating potential. Financial professionals carefully examine Jaya's music royalties to establish their current and expected future value. The valuation considers elements such as her song's popularity, frequency of airing, and the expansion of the streaming market.
Structuring: A financial institution develops distinct tranches of securities based on the valuation. Each tranche reflects a share of Jaya's music income and comes with a unique risk and return profile. For example, the senior tranche may get consistent and predictable royalty payments, whereas the junior tranche may have a higher potential for growth but also carries higher risks.
Issuance: To store and administer the IP assets, an issuing entity, often a special purpose vehicle (SPV), is formed. The SPV is a bankruptcy-remote entity, which means that in the case of bankruptcy, the creditors of the originator do not have access to its assets. The SPV is a separate legal entity from the source. As a result, the creator is not personally responsible for the SPV's debts. The IP-backed securities are issued by the SPV and subsequently offered to the market. To hold Jaya's music royalties and issue the securities, an issuing entity, similar to a special purpose vehicle (SPV), is formed. The SPV is separate from Jaya and ensures that royalties are collected and disbursed independently to investors.
Investor Participation: The securities issued by the SPV are purchased by investors such as music funds, pension funds, and individual investors. By doing so, they provide upfront capital to Jaya, and in return, they receive a share of the royalty income generated by her songs.
Cash Flow Distribution: As Jaya's songs continue to be played and generate royalties, the SPV collects these payments. The royalty income is subsequently distributed to the investors in accordance with the terms of each tranche by the SPV.
For Jaya: Through IP securitization, Jaya can get capital immediately without waiting for future royalties. This money can be utilized for new music projects, marketing campaigns, or personal endeavors. IP securitization enables intellectual property holders to unlock the value of their intangible assets without giving up ownership or control. They can access capital that was previously tied up in their IP, enabling them to invest in research and development, expand their business, or address financial challenges.
For Investors: This offers an opportunity for investors to invest in a diverse portfolio of music royalties. Depending on the tranche they choose, they can earn stable returns from the senior tranche or potentially higher but riskier returns from the junior tranche.
Market Perception: The success of this securitization is heavily reliant on investors' confidence in Jaya's music and her ability to continue producing popular songs.
Legal and Regulatory Compliance: Jaya and the financial institution must adhere to legal and regulatory standards related to intellectual property rights and financial securities. The legal framework for IP securitization in India is still evolving, but there are a number of laws and regulations that are relevant to this type of transaction. These include:
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act): This Act defines "property" to include intangible assets such as know-how, trademarks, copyrights, licenses, and franchises. It also provides for the creation of security interests over these assets.
The Indian Patents Act, 1970: This Act allows for the assignment, sale, and licensing of patents, and it also provides for the creation of security interests over patents.
The Trade Marks Act, 1999: This Act allows for the assignment, licensing, and mortgaging of trademarks.
The Copyright Act, 1957: This Act allows for the assignment, licensing, and mortgage of copyrights.
In addition to these specific laws, there are also a number of general principles of law that apply to IP securitization transactions. These include the principles of contract law, property law, and secured transactions law.
The legal framework for IP securitization in India is still developing, but it is clear that this type of transaction is becoming more common. As the market for IP securitization grows, it is likely that the legal framework will continue to evolve to meet the needs of market participants.
IP securitization enables IP holders like Jaya to unlock the full value of their intangible assets while also providing investors with exposure to the potential revenue generated by the IP. This financial approach can benefit both partners, but it must be carefully evaluated, structured, and compliant to ensure it is successful.
