Intellectual property has certain characteristics which allow it to be treated like any asset such as a house. In theory, any IP can be sold or borrowed against. In practice only a limited subset (eg patent licenses, copyrights, trademark usage) is recognised much less widely transacted. The more sophisticated knowledge intenstive countries with strong IP protection have evolved mechanisms for financing IP but there are inherent limitations due to the nature of intangibles (loan-valuation ratio hard to estimate, illiquid market means few transactions, high business risk and legal uncertainty means unfamiliarity).
Requirements for a Debt Instrument
The classic example of an IP Security is a Bowie Bond where the musician sold off the music royalties for his back-catalog. Extending this to other domains require identifying and surmounting a number of challanges:
- SECURITY - Intellectual property rights which are valid, enforceable and unencumbered
- SPECIFIC - Verifiable interest expressed by a qualified licensee
- SALES - licensee has channels/mechanisms to achieve sales with royalty component
- SUPERIORITY - Third party verification that the intellectual property has technical merit
- SCOPE - Independent economic valuation supporting the existence of a large and addressable global market.
Attempting to create an IP security requires assistance of an IT/IP law specialist. The reality is that financiers (whether banks or pawn shops) prefer lending against houses rather than the electronic equivalent of perishable vegetables. Basically there are checklists to verify clear title, avoid round-trip fraudulent purchases, endurance during life-span of security and reassurance of a large enough market.