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IP Regime in ChinaIP Monetization in China
Securitization is the jewel in the crown of IP monetization. In 2019, following the success of the first deal, the China market has seen more than 10 IP securitization deals, with accumulated proceeds exceeding CNY10 billion.
China's First Patent Securitization Deal is Approved
As a break-through in its IP financing endeavor, China approved the first patent securitization deal on July 31, 2019. The deal size was CN¥300 million, securitizing the royalties from a pool of 107 invention patents and 37 utility patents held by 11 high-tech companies in the Guangzhou Development District (the “Guangzhou Deal”). The Guangzhou Deal is the 3rd IP securitization deal in a row and the first of its kind. The previous two deals were backed up by royalties from copyrights and various kinds of IPs, including copyrights, trademarks, and patents. The Guangzhou Deal is unique in that it is solely backed up by patent royalties. This is a break-through deal because it is more difficult to evaluate a patent than other kinds of IP. The Guangzhou Deal also demonstrates that the development of the financial industry, the quality of patents, and the market appetite for IP securitization have all reached new levels in China. Going from Zero to a Ten Billion-Dollar Market in 2019 While the Guangzhou Deal is indeed a milestone, the Chinese market saw its first IP securitization deal in early 2019. The structure of the first deal creatively resolved long-standing issues in IP valuation and paved the way for the Guangzhou Deal along with many other IP securitization deals later in the year. The issuer in the first IP securitization deal was the Beijing Cultural and Technology Financial Leasing Company. Its parent company, Beijing Cultural Investment and Development Group Co., Ltd., provides credit enhancement through a guarantee. The deal size is about US$110 million. The underlying assets for securitization are receivables derived from various IPs, mainly consisting of copyrights, some trademarks, and very few patents in information technologies. The IPs are pooled from 400 firms in creative businesses, including art & performance, TV & film production, information technologies, and digital publication. Although this is the first IP securitization deal in China, there is still some debate. Some commentators believe this deal is not genuinely “patent securitization” because patents were only a small portion of the underlying assets. Leasing-Back to Mitigate Valuation Risks However, the “leasing-back model” used in this first IP securitization was quite creative and has made possible the first patent securitization mentioned. “Leasing-back” refers to “sale and lease-back”, meaning that the IP owners sell their IP to the financier, and then the financier leases the same back to the original patent owners. This arrangement helps to mitigate valuation risks in several ways. First, when the IP is “sold” to the financer, it must be tagged with a price. This transaction is made for the purpose of securitization, rather than in a normal course of business. However, this price is still determined in an arms-length transaction with assistance from a third-party appraiser. Without such a transaction, the parties would need to find a third-party appraiser to determine the value of the underlying IP. This leads to the issue outlined in the next point. Second, the original IP owners know the genuine value of the IP better than anyone else. Insufficient domain knowledge has been a long-standing issue in IP valuation. Solving this issue is costly and sometimes impossible because it is rare to find an appraiser familiar with the industry or industries of concern. Many valuation techniques can help. However, insight on the IPs’ value may only come from an insider practicing the IP on a daily basis. Therefore, the perspective of the original IP owners is irreplaceable. Interestingly, the leasing-back arrangement has a checks and balances, which ensures that the original owners do not ask for unreasonably high prices when selling their IP. If they do, they will need to pay a high rental to lease back the IP from the financier. Third, a leasing-back arrangement enables the original IP owners to continually utilize their IP. This ensures a more stable and predictable cash flow derived from the utilization of the IP. IP has no stand-alone value. There must be someone using their business skills to exploit the IP. Naturally, the original owners have the established experience and facilities to carry on such exploitation. Acceleration into a New Era After the success of the first deal, IP securitization deals surged in 2019. According to a survey by the Beijing Intellectual Wealth Group, 北京智慧财富集团, up until October 2019, the market has seen more than ten IP securitization deals launched or waiting in line for approval, with accumulated proceeds amounting to more than CN¥10 billion, including the historical first “pure” patent securitization deal, the Guangzhou Deal.[i] Meanwhile, leading professionals in the industry are gathering to form associations promoting IP securitization deals. For example, in November 2019, dozens of renowned IP experts – leaders from financial and securities industries and representatives from innovative companies – gathered in Beijing to announce the “Initiatives by 50 Pioneers Forum for IP Securitization,” “中国知识产权证券化50人论坛倡议书”, which benchmarks the arrival of the new IP securitization era in China.[ii] Notes [i] A summary prepared by Beijing Intellectual Wealth Group, 2019.11. Last visit 2019.6.6. Company home page: http://www.cnipbank.com/journalism.html?name=10. [ii]《中国知识产权证券化50人论坛倡议书正式发布》，trans., “Initiatives by Leading 50’s Forum for IP Securitization in China”. Last visit 2019.12.12. http://www.iprdaily.cn/article?wid=23059. (Dr. Jili Chung is currently working in Greater China. He is the founder of SpringIP Group and is dedicated to fostering enterprises’ innovation through AI and big data. Carlo Geremia, a contributor to this article, is a cross-border transaction expert residing in Shanghai and Italy.)
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