1. Introduction

While it might appear to be somewhat incongruous with the conventional investment wisdom that tends to characterize the financial markets, it should be understood that companies with little or no tangible assets can actually raise substantial funds without giving up a sizeable percentage of their ownership in the underlying corporate entity.

How could this seemingly incongruous reality be possible? To answer this critical question, we must conduct an assessment of the highly innovative strategies that involve the sale of security interests in intangible assets that are categorized as intellectual property (which specifically includes copyrights, trademarks, and patents).

In terms of its relative importance within the modern economy, the prominence of intellectual property (IP) as a valuable global commodity has risen quite quickly in recent years. So while the protection of tangible assets will continue to play a vital role in the overall strength outlined on the balance sheet of any business, the enhanced levels of return that corporations can derive from intangible assets are also worthy of high praise.

Here, it should be noted that several types of intellectual property exist within the context of this newly emerging global economy. Key examples might include trademarks, copyrights, and patents associated with the operations of a business. By extension, strategies devoted to IP protection now cover the majority of the world's hi-tech gadgets, consumer technologies, and corporate brands.

Although intellectual property is not a tangible commodity in the conventional sense, it is an asset, and as such, companies can obtain financing by using IP as collateral. But since these assets are intangible, even the most knowledgeable investment analysts can face significant difficulties when attempting to value the potential returns that intellectual property assets might be capable of generating in the future.

This method of transforming an asset (or a pipeline of cash flows) into a set of marketable shares is referred to as "securitization", which is a concept that's relatively well-known in the financial industry but still exists as a novelty when it comes to public's perceptions with respect to the use of intellectual property in global markets.1

What is Securitization?

Achieving a better understanding of IP securitization strategies generally requires a firm grasp on the concepts of market securitization, and this is why it is critically important to discuss these topics in greater detail. Unfortunately, there is often a significant amount of confusion surrounding the precise definition of the word "securitization" as a term within the global financial lexicon, so this is where we will begin:

Securitization is the process by which a right is integrated to a support so that said right can automatically be transferred of ownership and/or benefit and/or possession by the assignment of said support to a new holder.

Additionally, a highly relevant report that was published by the International Monetary Fund (IMF) defines the far-reaching concepts of securitization as follows:

"Securitization is the process in which certain types of assets are pooled so that they can be repackaged into interest-bearing securities. The interest and principal payments from the assets are passed through to the purchasers of the securities.

Until now, the processes of securitization have generally been used as collateral to secure interest-bearing securities. Essentially, securitization is the mechanism that an asset's owner (originator) uses to offer the asset to a special purpose vehicle/entity (SPV) created solely for this purpose. Once this occurs, the SPV then produces marketable securities that are secured by these assets, and sells them to financial market participants as asset-backed securities (ABS).

Revenues from the buyers' purchases of the ABS are also utilized by SPVs to compensate the originator. As a result of all of these efforts, an illiquid commodity held by the originator can be turned into a marketable asset via securitization and it should be relatively clear that the primary goal of securitization is to improve liquidity in the market against illiquid assets.

Here, please note that using an asset as backing a securities issue is not directly securitizing the asset, but securitizing a secured debt. In all of these ways, securities that are backed by high-value assets are formed with the help of securitization but it is important to have a full understanding of these distinctions before engaging in any of these practices.

Of course, only tangible or real assets such as property or land might have been used in the past to back these types of securities. However, in today's dynamic markets, IP assets are also used to back securities and these emerging trends have opened up new doors of opportunity for corporations around the world. In the following chapters, we will take a look at some of the best strategies that can be used to capitalize on these trends and to secure

What is Intellectual Property (IP) Securitization?

Since assets derived from intellectual property rights are often used for financing purposes, corporations with a strategic advantage must be aware of the fact that these IPs can be securitized when they have the potential to generate future receivables, such as possible royalty payments. Ultimately, the securitization of IP assets follows a mechanism that is similar to the securitization of every other asset (or asset-backed security).2

First, there is an asset owner (originator) ready to invest in businesses in order to gain future revenue rights that are based on a corporation's intellectual property assets. Future sources of revenue might include sales of goods that are covered by one of the definitions of intellectual property law, as well as royalties earned by selling, licensing or pledging intellectual property rights.

Within the realm of patents and copyrights, corporate income can be generated from licensing any form of security or by selling the underlying assets that the intellectual property right protects. In these ways, the originator would transfer the rights to potential cash flows from the underlying properties to a securities issue.

In practice, this could be conducted either through direct securitization or via an entity such as a special purpose fund in the case of indirect securitization (which is much like every other form of asset-backed security). After that, the special purpose fund would issue securities that are backed by future income sources in order to enhance operational performances.

One this occurs, investors would invest in the securities that have been generated and this enables the special purpose fund and/or the originator to recover their investment and earn a profit, or not (depending on valuation). Income sources received from the underlying security could then be used to pay the people who invested in the securities.

Within this dynamic arrangement, the special purpose vehicle requires a servicer who can receive money from the revenue source and deposit it into the special purpose vehicle. Furthermore, the servicer is responsible for covering the initial costs associated with operating the special purpose fund (as well as the securities issued).

In most cases, the servicer would deduct these expenses from the income stream produced by the underlying properties but it is also important to remember that the cost of having these securities rated by a credit firm is one of the charges that the servicer would deduct. When factoring in all of the possible expenses that might be incurred during the process, it is possible to maximize the potential for profitability over time.

Additionally, credit ratings for intellectual property-backed securities are often needed so that ordinary people with limited knowledge of IP securities can recognize the risk factors associated with the security when determining whether or not to invest.

Of course, credit rating firms cannot measure intellectual property-backed assets in the same way as other assets and must devise a unique approach to rate them accurately. For example, when rating intellectual property-backed securities, Moody's Investor Service generally considers how the technical market is evolving in relation to the assets in the pool, how rapidly the technology will become outdated, which brands are included in the portfolio, and so on.

Overall, this approach demonstrates the various ways in which credit rating agencies must understand not just the pool of assets but also the changing world around them and the broader impact these events will have on global financial markets.

Why is Intellectual Property Securitization the Future of Securitization?

In the early 1980s, asset securitization began with the securitization of credit card receivables and auto loans. It has since expanded to include a wide variety of assets, ranging from auto loans to restaurant sales and...