IP Monetization in China
The STAR Market
The STAR (Sci-Tech innovAtion boaRd) Market is China’s counterpart to NASDAQ and has become a new board in the Shanghai Stock Exchange (SSE) since 13 June 2019. In its continued effort to increase the size and depth of its financial market, China launched the STAR Market to address the needs of the innovative industries. Anyone seeking to observe China's innovation developments must use it as a window.
According to the SSE, the mission of the STAR Market is to:[i]
Undoubtedly, the establishment of the STAR Market carries positive implications for IP monetization. The listing rules of the STAR Market support innovative companies that have impressive IPs but not enough revenues to obtain financing in the traditional capital markets. In other words, the STAR Market provides an additional and more structured option to those who seek to monetize their IPs in China.
To this end, certain listing rules set out specific disclosure requirements for the underlying IPs of companies seeking to list in the STAR Market. In addition, these rules request a detailed elaboration on how their IPs are essential to the potential growth of the companies. The scope of these most significant disclosure rules cover, among other things, a company’s [ii]:
1. Key technology staff members
2. Competitive advantages in connection with its underlying IPs
3. Key intangible assets and their composition, with classification into their respective IP categories, i.e., patent, trademark, copyright, trade secret, etc.
Because of its special focus and purpose, the STAR Market has become an indispensable sector of China’s innovation regime. As such, for deal makers pursuing opportunities in IP monetization in China, it can serve as a valuable window to observe the development and dynamics among various driving forces. The STAR Market offers information otherwise unavailable or previously difficult to collect.
Observers now may investigate the market’s trade volume, total number, and composition of the listed companies, along with their financial performance to get a sense of the innovation activity in China. For example, in December of 2019, out of the 64 companies listed in the STAR Market, 14 companies belong to the health industry (21%); and 10 out of these 14 listed companies (71%) are in the medical device industry. This profile provides a bird’s-eye view to deal-makers seeking “hot zones” to monetize their IPs in.
Observers may also investigate the trading regulations, rules, or administrative orders, as enacted by the SSE for the Star Market to understand the current regulatory intent. The SSE adopts new regulatory regimes in response to contemporary issues. The regulatory intent, therefore, is like a mirror that reflects the goals or challenges from different stages of development in the innovative industries in China. Such regulatory changes particularly provide insights in the area of IP. For example, the relevant listing rules cover, in-length, the connection between companies’ IP portfolio and their competitiveness in the market. The listing rules scrutinize this aspect in response to a common, but misleading, practice where Chinese companies often claim themselves to be “innovative companies” based on a sizable patent portfolio which actually does not have any genuine value.
In short, IP monetization deals in China benefit from the growth of the STAR Market. While in the hand of an ordinary observer, like a thermometer, it provides a quick impression on the innovative activities in China; while in the hand of a professional deal-maker, it provides accessible, rich, detailed information to identify the risks and opportunities from IP monetization deals.
[i] “Mission and Vision” of the SSE STAR Market. http://star.sse.com.cn/star/en/gettingstarted/overview/.
[ii]《公开发行证券的公司信息披露内容与格式准则第 41 号—科创板公司招股说明书》, trans., “Guideline for content and format for disclosure of IPO companies – Prospectus for STAR Market Company.” CSRC, 2019.3.1.