September 1, 2015
Further to the release of the Intellectual Property (IP) Hub Master Plan by the IP Steering Committee in April 2013, Singapore has announced the roll-out of a S$100 million two-year Intellectual Property Financing Scheme (the IP Financing Scheme) targeted at IP-rich and asset-light companies in the technology sector.
Under the scheme, Singapore-incorporated companies may use their granted patents as security for loans from participating financial institutions.
The Singapore government will partially underwrite such loans.
This article will focus on the practical aspects relating to the taking of security over IP assets,particularly in the context of Singapore and the framework under the IP Financing Scheme.
Some general principles relating to the taking of security over IP rights are discussed below.
(1) Types of IP rights
IP rights may be classified into two broad types - registered IP and unregistered IP.
Public registers exist in respect of certainIP rights - in particular, patents,trademarks and registered designs.
In Singapore, these IP rights are registered with the Intellectual Property Office of Singapore (IPOS).
In contrast, there are no public registers which record other types of IP rights, such as copyright and trade secrets.
The registrability of IP rights impacts upon a lender’s ability to conduct due diligence on such IP as well as the manner of taking security over such IP.
(2) Manner of taking security
In the case of registered IP, statutory legislation in Singapore expressly provides that such IP rights constitute personal property and that the same may be assigned or charged by way of security.
The Trade Marks Act and Registered Designs Act provide that registered trade marks and registered designs can be assigned by way of security, and that a floating or fixed charge may be granted over these IP rights, while the Patents Act provides that any patent or application for a patent may be assigned or mortgaged under section 41(2).
Lenders may take security over registered IP through an assignment by way of security (generally with a licence back to the chargor permitting its continued use of the IP) or a fixed or floating charge.
Where the assignment relates to a pending application for registration, the assignee steps into the shoes of the assignor, and acquires the rights and benefits of the assignor as from the date of the assignment (and not from the date of the application for registration).
As registration of IP rights applies in each case for specific periods of time, the security should include covenants on the part of the chargor to maintain registration, to pay all necessary fees and not to act in a manner which may prejudice the registration.
In addition, the chargor should be required to take action to protect the IP rights and to pursue infringers where appropriate.
In contrast, where a lender takes a legal mortgage over registered IP, it will necessarily bear primary responsibility for maintenance and protection of such IP rights.
In such event, the security should expressly permit the lender to recover the costs of such maintenance and protection from the mortgagor.
In the case of unregistered IP of little commercial value, the lender may be content to rely upon a general floating charge within its debenture security.
It should however be noted that a floating charge may be unsatisfactory as a method of taking security over unregistered IP, as it would potentially allow borrowers to sell off commercially valuable IP before the charge crystallises.
As such, if the IP is of particular value, the lender should consider taking security by an assignment by way of legal mortgage over such IP.
To permit the mortgagor to continue to use the rights, the lender will generally grant back to the mortgagor an exclusive, royalty-free licence.
Where the IP generates recurring royalty payment streams through licensing agreements to third party licensees, lenders may also take security over these royalty payment streams.
IP royalty financing allows the owner of the IP to retain an equity interest in the IP, enabling the owner to still profit from the upside value of the IP beyond the security interest on the debt.
(3) Due diligence on IP rights
As with any asset offered as security, lenders will need to conduct due diligence on IP offered as collateral.
In the case of registered IP, the registers administrated by IPOS contain publicly available information on the scope, duration and ownership of the IP rights,enabling lenders to easily verify thesedetails.
Assignments and mortgages of these IP rights may also be recorded on the register and lenders may thereby obtain information about these.
It should be noted that registration of such transactions is not compulsory anddoes not per se affect the validity of the transaction as between the parties thereto.
However, until an application has been made for the registration of such transaction, the transaction is ineffective as against a third party acquiring a conflicting interest in or under the registered IP right in ignorance of the transaction, and the assignee is not entitled to claim for damages.
The lender should therefore confirm that there is no earlier security interests registered against the IP over which security is to be granted, or any licences (particularly exclusive licences) which would significantly impact the resale value of the IP in the event of realisation of the lender’s security.
In contrast, the due diligence that can be carried out in respect of unregistered IP is substantially limited, as there is no register against which information relating to such IP rights can be verified.
To the extent that unregistered IP forms an important part of a borrower’s portfolio.
However at the very least it should be confirmed that the borrower is the legal owner of the rights in question.
(4) Procedural requirements and perfection of security
When taking security over IP rights,lenders should also be cognizant of the procedural and perfection requirements which apply in relation to such security.
(a) Security to be in writing and signed by assignor/mortgagor
The Patents Act provides that an assignment or mortgage of a patent or an application for a patent shall
be void unless it is in writing and is signed by or on behalf of the assignor or mortgagor.
An assignment failing to meet the requirements of section 41 may nevertheless be effective in equity but will of course be subject to being defeated by a bona fide legal assignee for value and without notice of the prior equitable interest.
The Trade Marks Act and Registered Designs Act provide that an assignment by way of security of a trade mark or registered design shall not be effective unless it is in writing and is signed by or on behalf of the
assignor or mortgagor.
Where the assignor is a body corporate, the seal of such body corporate should be affixed to the
(b) Notification on the relevant IPOS register
Lenders should ensure that their security interest over registered IP is notified on the relevant registers
maintained with IPOS.
Registration serves as notification to third parties of the lenders’ security interest and a failure to
register may result in such security interest being defeated by later conflicting interests which were
entered into with no notice of the earlier transaction.
Although it may well be possible for a lender to take security over an unregistered trade mark, the lender should ensure that any marks of commercial value are duly registered by the owner as a condition to the grant of its loan facilities, in order for the lender to effectively protect its own interest by registration.
(c) Filing of charge under section 131 of the Companies Act
Section 131 of the Companies Act mandates that where a company creates a charge over certain
classes of assets, it shall lodge with the Registrar a statement containing the particulars of such
charge under section 131(1).
In particular, a company will be required to lodge statements in relation to a floating charge created
on the undertaking or property of the company under section 131(3)(g) and a charge created on a patent or licence under a patent, on a trade mark, or on a copyright or a licence under a copyright under section 131(3)(j).
Recommendations of the Steering Committee and the IP Financing Scheme in Singapore
The IP Financing Scheme was implemented pursuant to the Steering Committee’s recommendation, to encourage the creation of IP-backed loans, one of the classes of IP financing identified by the Steering Committee.
(1) Classes of IP financing identified by the Steering Committee
The Steering Committee identified three broad classes of IP financing in the IP Hub Master Plan:
IP funds - Strategic investment by venture capital and private equity funds in IP assets, such as the
purchase of patent titles to gain profits from their sale and licensing,and direct investments in targeted
IP-rich companies or portfolios.
IP-backed loans - Loans which are partially or wholly secured by the borrower’s IP assets as collateral.
IP securitisation - The transfer of IP assets to a bankruptcy-remote special purpose vehicle, which can
then raise funds through the issuance of securities backed by such IP assets.
The Steering Committee was of the view that financing of “early stage IP” (IP in the earlystages of development) should primarily be leftto IP funds to more sophisticated investors,due to the higher risk profile at this stage.
In contrast, banks are in a position to play a greater role in the financing of more mature and proven IP where the risks are more defined and can be better managed, through IPbacked loans and IP securitisation.
To encourage the creation of IP-backed loans, the Steering Committee recommended that an IP financing scheme be introduced, where the government partially underwrites the value of IP as collateral.
(2) IP Financing Scheme
Under the IP Financing Scheme, Singapore-incorporated companies may use their granted patents as collateral to secure loans from the participating financial institutions (currently DBS Bank Ltd, United Overseas Bank Limited, and Oversea-Chinese Banking Corporation Limited).
The prospective borrower must first approach any of the participating financial institutions for a preliminary credit assessment.
The borrower will then need to appoint an IP valuer from a panel of approved valuers to determine the value of the granted patent(s). Valuation will generally take approximately one month.
Finally, the borrower will need to submit a formal application for the loan to the relevant participating financial institution, together with the valuation report for the granted patent(s).
The valuation report must be submitted within four weeks from the date thereof.
IPOS will also provide a valuation subsidy to successful applicants, in an amount equivalent to the lowest of (i) 50% of the IP valuation cost, (ii) 2% of the value of the IP and (iii) S$25,000.00.
To be eligible for the subsidy, the applicant must have drawn down on 100% of the approved loan.
It should be noted that the IP Financing Scheme does not extend to all types of IP financing nor to all types of IP rights as collateral.
The scheme is limited only to loans granted by the participating financial institutions to Singapore-incorporated borrowers, where registered patents are offered as collateral.
(3) Lenders’ concerns relating to the taking of security over IP rights.
While the implementation of the IP Financing Scheme does not prevent lenders from taking other types of IP besides granted patents as collateral for their loans, the Steering Committee noted that IP financing is still not widely accepted by financial institutions, due to certain key concerns in relation to the taking of security over IP rights.
These concerns and the recommendations of the Steering Committee to address them are briefly
Concern with the availability of marketplace avenues to liquidate IP assets.
The Steering Committee recommended that the Government work to develop a vibrant IP marketplace, by supporting and co-funding a diverse range of marketplace avenues across the entire marketplace, thus giving financial institutions many avenues to liquidate IP assets.
Lack of confidence in the valuation of IP assets
The Steering Committee recommended that a Centre of Excellence for IP Valuation be set up to raise competency of IP valuation within the industry and ensure a minimum standard of proficiency in IP valuation services.
It should be noted that the IP Financing Scheme also addresses this issue by mandating that borrowers appoint an IP valuerfrom a panel of approved valuers.
Concern with the volatility of IP asset values, in particular, patents, due to potential disruptive technologies and changes in applicable laws with regard to patent damages
The Steering Committee recommended that the Government work with the industry to encourage positive practices that would encourage the transparency of IP transactions, including the recordal of IP transactions with IPOS and the disclosure of information related to IP assets by listed companies, providing investors with more information on IP assets held by companies.
Concern with the need for enforcement and litigation to preserve the value of IP assets
The Steering Committee recommended that Singapore be developed and marketed as one of
the world’s leading IP dispute resolution centres, by enhancing the profile of Singapore’s existing IP
court and increasing alternative dispute resolution avenues for the resolution of IP-related disputes,through the establishment of a panel of top international arbitrators in Singapore.
Concern with market transparency
The Steering Committee recommended that the Singapore Exchange encourage listed companies to disclose their IP rights.
A clear and structured disclosure of IP rights of material importance can provide investors with better insights into the company’s strengths and potential growth.
In the increasingly knowledge-based global economy of today, IP assets and IP-related transactions are likely to become an increasing commercial importance to companies and financial institutions alike.
The Steering Committee’s recommendations and the implementation of the IP Financing Scheme provide a good starting point for borrowers and lenders to increase their familiarity and comfort with IP as a form of
Rodyk acted for IPOS in relation to the IP Financing scheme through which IPOS supports the banks which provide the IP financing to companies and businesses which use their IP as collateral.
Rodyk was involved in preparing all three agreements with the participating financial institutions as well as in the negotiations with financial institutions.
Intellectual property & technology partner Yew Woon Chooi led, supported by senior associate Elvin Yeo.