The application scope of asset securitization is constantly expanding, including loan assets, receivable assets, fee-based assets, etc. Before these evolutions touched the field of intellectual property, the concepts or principles of transactions were relatively similar, because the assets involved were mostly property or rights naturally generated in economic activities and were relatively easy to observe and grasp. However, intellectual property rights differ in many ways from these properties or rights that people take for granted. Intellectual property rights are an intangible right created by national sovereignty through legal means to balance various conflicting purposes. Its characteristics are very different from ordinary assets. When traditional securitization operations are applied to intangible rights such as intellectual property, some special risks will arise.
The realization of future claims has to be performed
The participants in intellectual property securitization are mainly the licensors, authorized parties, ad hoc carriers and investors of intellectual property** * Quartet. The authorizer is usually the initiator of securitization. He transfers the royalties (future claims) that can be collected from the authorized party in a certain period of time in the future to a special vehicle in one go, and then the special vehicle operates through securitization. Issue securities to investors. When the ad hoc vehicle receives royalties in the future, it will deduct relevant administrative expenses according to the agreement, and the balance will be paid to investors in the form of principal and interest on the securities according to the conditions recorded in the securities. Going back to the source, in intellectual property securitization, the source of payment of the principal and interest of securities is usually the intellectual property licensing contract. However, the high degree of execution of intellectual property licensing contracts has become a source of risk. That is to say, the authorizing party (the originator of securitization) often must assume substantive obligations under a number of contracts, and if he fails to perform according to the contract, the authorized party can refuse to pay part of the authorization fee. In this way, the ad hoc vehicle will If the originally expected cash flow cannot be obtained, principal and interest cannot be paid to securities investors as agreed. In contrast, for future claims based on corporate loans or housing mortgages, the realization of the claims is usually only a time factor, and there is no substantial contractual obligation waiting for the sponsor to perform. Comparing the two highlights the unique risks of intellectual property securitization.
Because intellectual property securitization involves such risks, the underlying transaction content that generates cash flow must have higher disclosure requirements than other asset securitizations. Take housing mortgage securitization as an example for comparison, where the underlying transaction is a loan agreement between the bank and the owner. When the securitization proceeds, the bank has already issued the loan, so even without disclosing the contents of the loan agreement, investors can understand the nature of the bank's claim rights. However, due to the pending performance of intellectual property licensing contracts, investors will not be able to truly judge the risks involved in securities if the obligations and performance capabilities of the sponsor (licensor) under the contract are not fully disclosed. For this reason, the sponsor should be required to explain the performance of the authorization contract, including the obligations that the sponsor needs to perform, the performance plan and means, and the resource allocation for performance. In addition, the sponsor should continuously disclose the status of its performance, and the specific degree of disclosure can be based on the principle of proportionality, depending on the degree of performance expected from the sponsor.
Reusability of underlying assets
The re-licensability of intellectual property is an important feature that is different from other securitized assets. Intellectual property rights can generate new contractual claims every time they are authorized. This infinitely reusable nature is, on the one hand, the potential of intellectual property; but on the other hand, it also creates risks that other asset securitizations do not have. If the sponsor authorizes new authorized parties after the securitization transaction, although the sponsor can obtain new income, the original authorized party may face competition due to the increase in the total number of authorized persons, and even the income may decrease. Since the calculation of the authorization fee is generally linked to the income of the authorized party, a decrease in the income of the original authorized party will lead to a decrease in the cash flow collected by the ad hoc carrier, ultimately affecting the principal and interest income of investors. Noting that this repeatable authorization may also bring benefits to securitization participants under certain conditions. Taking the securitization of credit assets as an example for comparison, if a debtor of a credit loan defaults, the accounts receivable may not be recovered, thus reducing the cash flow of the securitization. However, in intellectual property securitization, if a similar default event occurs, since the intangible assets are not consumed or exhausted, the intellectual property can be used by new authorized parties, thereby generating new income to supplement cash flow.
For example, in the case of trademark rights securitization of Athlete's Foot, a well-known American sportswear brand, the sponsor used the royalties generated from the trademark licensing contract and franchise contract to securitize. After the securities was issued, a major franchisee (authorized party) unexpectedly went bankrupt, but this accident did not affect the interests of investors. The reason is that the store operated by the bankrupt franchisee was taken over by a new operator in a short period of time. According to the agreement between the parties to the securitization transaction, the new operator quickly obtained the franchise authorization, so there were new operators. The cash flow generated made up for the shortfall in revenue caused by the bankruptcy of the main franchisee.
In addition, intellectual property rights are divisible among different rights holders. This property is similar to the aforementioned reusability, both stemming from the intangible nature of intellectual property. But it is also different, because the result of division can allow more than one rights subject to share interests in the same knowledge product, and at the same time, the status of each subject is independent of each other, and the rights do not interfere with each other. For example, the distribution rights, reproduction rights or performance rights of a copyright can belong to different people, or to two parties at home and abroad. This division of the scope of rights can be simply determined by the authorization contract. How the contract is described will determine what kind of rights may be generated. This type of cutting operation is commonly seen in securitization transactions. For example, in the well-known securitization case of Chrysalis music works, the publisher only obtained the distribution rights in the copyright, but it could securitize the future income generated by this right. In addition, in the case of DreamWorks film copyright securitization, the issuer retained the income rights of its domestic theaters and TV channels, while cutting off other copyright property rights for securitization. While this divisibility brings flexibility to securitization transactions, it also brings risks. Precisely because this division of rights can be simply achieved by contract, it is not easily detected by non-contracting parties. As a result, once the divided rights overlap, conflict, or become confusing, and even lead to the need for litigation, then even though the investors in the securitization ultimately win, the fluctuations in security prices are enough to damage the investors' rights and interests, and jeopardized economic stability. This risk is mainly caused by the fact that the existence of the authorization contract is not noticed by third parties outside the contract. This may be because the non-contracting party is not cautious enough and is deliberately deceived, or it may be caused by the failure to conduct reasonable investigations. Considering the validity of these reasons in claiming rights is actually entering the scope of operation of the rights registration and publicity system. If there is a clear and efficient registration system, the priority of those with conflicting rights in the confrontation process can be clearly determined according to the scope of registration, and the adverse impact of this confrontation process on economic stability can be controlled.
The most direct measure to address these risks is to make changes in intellectual property rights relatively easily known, and this involves the design of the registration and disclosure system. In the practice of intellectual property securitization, the United States discovered the importance of this issue and began to explore a unified registration system for intellectual property. That is to say, information technology is used to integrate various transaction registration and disclosure information involving the transfer, guarantee, and authorization of intellectual property rights into a registration system for the public to query online. Due to the advancement of information technology, it has become feasible to build such an efficient registration and query system. In the past, in order to obtain a piece of information, one had to travel across mountains and rivers to reach the storage location of the information materials. Searching, registering or searching in physical files required great economic costs, thus making this solution unfeasible. Nowadays, the advancement of information technology has made it possible to travel through space and read a large amount of data information at the snap of a finger, so the cost issue has been reasonably controlled. Of course, such registration may cause some inconvenience to the exercise of intellectual property rights, but such registration disclosure requirements can be applied selectively, for example, only to intellectual property rights that are intended to be securitized or have been securitized.
The instability of the scope of property rights
The essence of intellectual property rights is based on the role of state power, which gives individuals exclusive rights on certain intellectual products. In other words, the existence of intellectual property rights is an artificial administrative result under the operation of law, rather than a natural occurrence in economic activities. The acquisition of original intellectual property rights and the definition of the scope of rights inevitably involve the participation of human administration. However, manual administration is inevitably limited by knowledge, experience and resources, and errors may occur. Therefore, whether it is the review process or the judicial process outside the review process, the scope of intellectual property rights may be changed or eliminated at any time.
Once this happens, the cash flow generated by it will be affected or even disappear, and securities investors will not be able to obtain the expected repayment of principal and interest.
In other asset securitization transactions, this type of risk of rights defects is generally controlled through due diligence by lawyers and accountants. However, this approach has limitations in IP securitization. As far as intellectual property rights are concerned, the judgment of infringement or invalidity cases is highly professional and often has murky areas, so it is technically difficult to pass general legal due diligence and effective identification. Even with the assistance of experts in relevant fields, it is sometimes not possible to absolutely determine the scope of rights.
For example, in a patent application, the words in the claims are usually the result of deliberation and negotiation between the applicant and the examiner. Due to the limitations of human wisdom, such negotiations cannot be exhaustive throughout the ages. Therefore, even if a patent certificate has been issued, the right holder cannot rule out the possibility that its granted rights may overlap with other patents and be challenged accordingly. Similar problems also exist in the practice of the trademark registration system. This shows that the definition of the scope of intellectual property rights is in many cases impossible under the intellectual property system and must be accomplished with the help of the judicial system.
Before litigation actually comes, no one can guarantee whether the intellectual property rights are intact. However, regardless of the size of the risk, as long as the parties to the securitization can classify the risk scenarios, it is possible to share the risk through an agreement. For example, the parties to a transaction can stipulate the responsibilities and rights that each party shall bear when rights are defective, such as: the right to request damages, reduce the price, terminate the contract, request continued performance, request liquidated damages, and suspend payment of the price, Or increase or exempt responsibilities or rights in various forms. This kind of agreement must be based on a clear civil and commercial law framework, so that all parties to the transaction can be sure that the agreement on risk allocation has the predictability of legal effects. In fact, the nature of this risk is an inherent risk in the intellectual property system. It exists with the system and is therefore difficult to completely eliminate through adjustments within the system or contractual arrangements. However, the risk that is eliminated can be passed on to third parties outside the contract. This is just like taking transportation. People always want the convenience of travel, but traffic accidents cannot be fundamentally eliminated. Therefore, people buy insurance to transfer the economic risks of accidents to third parties other than the perpetrator and the victim. Following this line of thinking, Europe and the United States have gradually explored intellectual property insurance in practice.
Uncertainty of market value
The value of intellectual property and its derivative rights is greatly affected by factors such as consumers, market conditions and substitutes, so the market value may Make a difference in a very short period of time. For example, as popular tastes change, a popular work may gradually become less popular; a technology may quickly disappear from the market as a better alternative becomes available. This uncertainty of market value is actually an external phenomenon manifested by the above characteristics through the market mechanism in economic activities. For example, intellectual property rights are generated as a result of government administration, so there is uncertainty about their existence and scope, and once challenges arise, prices will fall. For another example, the realization of intellectual property value comes from the industrial chain formed by division of labor between different entities through authorization or rights cutting. In this chain, once a certain entity changes, changes in supply and demand will affect various products in the chain. value. This uncertainty in market value naturally limits the development of intellectual property securitization. However, in practice, people have also figured out response measures applicable to individual intellectual property rights. For example, in the securitization of film copyrights, bankers have observed from past experience that the box office revenue in the first week of a film's release is highly correlated with the total revenue that the film will eventually generate, so it can be used to predict the future with relative accuracy. The valuation of its securitization. It can be said that this solution is case-by-case and there is no standard solution that applies to all intellectual property rights. However, for individual targets, as long as a reasonable solution is found, the chance of successful securitization will be greatly increased.
In addition to market factors, the reason why the value is difficult to determine may also come from the intellectual property right holder (usually the initiator in securitization) itself. In addition to the intellectual property rights themselves, the reason why the authorized party obtains authorization from the promoter is usually due to the promoter's own market size, management team composition and related resources that it can control.
Even if a certain intellectual property can generate huge cash flow from licensing, when the intellectual property is auctioned in isolation from the sponsor, it will be separated from the resources controlled by the sponsor, so the value that can be realized may be quite limited. According to statistics from foreign scholars, the combined effect of these factors is that the value of intellectual property rights in bankruptcy and liquidation procedures will decline rapidly, with a monthly decline of up to 2 to 5 percent, much higher than that of land or other entities. assets. Faced with this risk, efficient bankruptcy procedures can reduce the loss of value of intellectual property rights in the proceedings. This depends on the reasonable construction of the bankruptcy law framework, and also includes the consideration of special laws to regulate the applicable laws and regulations in bankruptcy proceedings. Exceptions to the Rules for Disposal of Intellectual Property Rights. As for the discovery of the market value of intellectual property, it depends on a professional team and a prosperous trading market. Taking the United States as an example, due to the rapid depreciation of the above-mentioned intellectual property rights during auctions, the practical community realizes that speed is the key to the realization of intellectual property rights, and is committed to creating a set of operating procedures based on the close cooperation of various professionals to shorten the process. Time for the realization of intellectual property rights. Examining my country's current situation in this regard, it can be found that the construction of my country's trading market has begun to bear fruit. However, the existing property rights trading market still focuses on technology transactions, and copyright and other types of intellectual property are still in the exploratory stage. Compared with the construction of trading markets, our country is relatively lacking in intermediaries and professionals. In particular, there are still few cross-field and cross-disciplinary talents and teams in the market to provide integrated financial, technical and legal services. This is a direction that needs to be worked on.
The nature of public property of intellectual property rights
Highly applicable intellectual property rights may become an important pillar of industrial development and can generate huge output value. From the perspective of the overall interests of society, the impact of certain intellectual property rights cannot be ignored, especially core industrial technologies, drug patents that maintain people's livelihood and health, or long-established national brands. Since intellectual property has the characteristics of public property, intellectual property securitization must take into account the externalities of transactions.
In addition, from the perspective of financing effects, other asset securitization affects a relatively small number of market participants; while intellectual property securitization can affect an unspecified majority of society. Intellectual property securitization can be compared to an institutional machine. Because of the leverage effect, the influence of system users is expanded. Unlike other tangible assets in securitization, intellectual property can be continuously reused. This characteristic can be likened to the fire of intelligence. As long as a good environment and funds are provided as fuel, it can continue to burn and expand. The positive side can promote production and benefit people, but the negative side can also destroy property and cause losses. If the sponsor uses this financing method for intellectual products that are harmful to social stability, order, or controversial, intellectual property securitization will become a system that expands moral hazard. The aforementioned leverage effect will change the balance point of conflicts of interest under the intellectual property system. In other words, the legal limits for review, granting or exercise of rights stipulated in the intellectual property system are of course based on the interests of the public. However, after the amplification effect of the securitization system, a legally recognized intellectual product has resulted in The social cost may become non-negligible. Taking online games as an example, Japan has applied securitization to the development of game software. The production cost of a game often requires hundreds of millions of yuan, and the effect of the production process on the development of surrounding industries is also extremely obvious. When an online game is completed, there is no doubt that the underlying storyline, characters, and programming are protected by copyright law or computer software protection law. When this game swept the attention of tens of millions of netizens and even made many young people addicted to it, it became a controversial issue. In this regard, some people argue that excessive addiction to computer games among schoolchildren is a social problem that should be controlled; on the other hand, some people argue that the development of such games can improve the technological level of the information industry and should be encouraged. In any case, this is a controversial application of intellectual property securitization. From the perspective of the sponsor and even all parties involved in the securitization transaction, as an "economic man", there is no need to consider the social costs that may be paid for such applications. In fact, such costs are difficult to include in financial calculations. middle. Since this risk is an externality, it must be regulated by the intervention of public power. Corresponding regulatory agencies should disclose the nature of relevant intellectual property rights to a certain extent before securitization transactions, so that limited administrative resources can be used to regulate risks.
Of course, this kind of self-regulatory group supervision has controversial opinions in theory, both positive and negative. However, in practice, as a supplement to government supervision, it is a pragmatic and compromise approach.