Get Up, Stand Up for Your Rights: Intellectual Property (IP) Rights. How IPRs Can Help Our Creators Access the Finance They Need to Innovate and Grow.
Bowie, James Brown, Motown, the Isley Brothers – these are all artists who were able to securitize their IP to varying degrees of success but is this the right strategy for the Caribbean? In this piece we explore how we can support our creators in using their IPRs to access the finance they need to innovate and grow.
It is no secret that one of the Caribbean’s prime asset is its creativity. At the core of their business models, creative entrepreneurs turn their intellectual property into cash flow. They innovate. They experiment. They take risks.
The intellectual property system was designed to reward such entrepreneurs who take on investment risks to innovate. The IP system, composed of Intellectual Property Rights (IPRs), such as copyright, trademarks, and patents, is intended to reward entrepreneurs and firms that undertake investments in both soft innovation (i.e. which typically occurs in the creative industries [[1]]) and hard innovation (i.e. such as that which typically occurs within the manufacturing sector). Yet, according to the 2013 PROTEqIN dataset, one of the major barriers firms face in pursuing innovation and growth objectives is accessing finance [[2]].
Accessing private finance can occur through four main traditional mediums (1) commercial banks (2) investment banks (3) angel investors and (4) venture capital funds. Creative entrepreneurs and firms face challenges, mainly stemming from information asymmetry, in optimizing the use of these financial mediums. Commercial banks, for instance, do not readily grant loans to intangible asset based firms for three main reasons (i) there is no methodology/guidelines in place to value the IP assets or how to treat it on their balance sheets (ii) many creative innovators and firms do not have historical transactions to document their revenue streams and/or (iii) there is a perceived difficulty in the ability to recoup finances should there be a default on the loan. With regards to raising funds from capital markets, such as that proposed by IP securitization, there are several elements that need to be in place which is explored later in this piece.
Given that access to finance is often cited as one of the major barriers to firms interested in innovating and growing, the goal is to understand the types of market failures and to then explore feasible options for demonstrating and expanding the successful use of IP based financing. Grazzi and Benavente (2017) explore the role of public policy in addressing the identified market failures for promoting innovation in the creative economy. They do so along the dimensions of supply side, demand side, human capital formation, and systemic innovation policies. Supply-side innovation policy can address the “public good nature of cultural and creative goods and services, externalities, and network effects, as well as the uncertainty and cost structure related to high fixed and sunk costs [which] all prevent private finance from providing adequate funding” to intangible asset-based firms. Direct support can take the form of grants, subsidies or other kinds of financial assistance. Government guaranteed loans, for instance, may permit more affordable and accessible loans. Other indirect support (through special tax regimes or tax incentives) serve as useful stimulants. Furthermore, entrepreneurship policy instruments can support creative startups and particularly address financing constraints faced by new entrepreneurs.
The Role of Moveable Assets. To move towards solving this issue of accepting IP as a category of moveable assets, Jamaica, with the support of Compete Caribbean/IDB and other actors, embarked on a strategic trajectory in implementing the SIPPA. In 2013, the Government of Jamaica enacted the Security Interest in Personal Property Act (SIPPA) and established the National Collateral Registry to provide increased access to credit for micro, small and medium-sized enterprises (MSMEs) and entrepreneurs. According to the project proposal submitted by the Jamaica Intellectual Property Office (JIPO) in response to a Compete Caribbean call for business climate reform projects, the SIPPA “is expected to facilitate the use of a more expansive range of collateral in secured lending, such as inventory, accounts receivable and intellectual property, thereby improving access to credit, particularly for those without more traditional forms of security. The four (4) fundamental principles of the SIPPA are as follows: (i) Creation of security interests in any form of personal property (tangible or intangible, present or future); (ii) Clarification on priorities among the different claims, by creditors, on the secured property; (iii) Registration of security interests in personal property; and (iv) Enforcement, by creditors, of property rights in the secured property, in an efficient manner.”
The Government of Jamaica in the enactment of the SIPPA set the foundation for permitting securitization and collateralization. Yet as of now, less than 1% of all registered assets are movable assets, including intellectual property, indicating a gap that needs to be addressed. [[3]]
Putting the Elements in Place. Given the relative novelty of securitization and collateralization of intellectual property (IP) assets in the region, JIPO and Compete Caribbean organized consultations to gather the perceptions and experiences of key stakeholders in improving the intellectual property system, specifically as it relates to access to finance based on the use of intellectual property rights.
A workshop on “Intellectual Property Based Financing Options for Promoting Innovation and Growth in Jamaica” was held on March 20th, 2018. The objectives of the workshop were (i) to discuss the process of securitizing IP assets and other best practices for improving access to credit for creative enterprises and entrepreneurs within a Secured Transactions Framework; (ii) to improve the understanding of demand- and supply-side constraints for IP based financing; and (iii) to identify the necessary elements required for securitization of IP Assets to successfully be utilized by entrepreneurs and enterprises in Jamaica.
Dr. Fred Aarons presented a few cases of IP securitization which occurred in the music industry. In 1997, David Bowie successfully converted his music royalty rights to his first 25 albums (approximately 287 songs) into an asset-backed security worth approximately USD$55 million and conveniently known as the “Bowie Bond”. [[4]] The bond was eventually down-graded and repayment took longer than expected (the role of the internet and online streaming in part had a role here). Another hallmark case was that of James Brown who had a catalogue of approximately 750 songs! Approximately $26 million in bonds was sold. [[5]] Unfortunately, James Brown passed away during a lawsuit seeking to refinance the bonds.
Through the workshop and shared cases, a few key lessons were learned from Dr. Fred Aaron’s presentation on IP Securitization which can be found below. Ultimately, there remain a number of key steps or elements that are required before reaching the end-results of IP securitization. (For more details, see his PPT presentation at the bottom of the article.)
- IP Securitization, for patents and other IP asset class types, essentially involves converting an IP asset into a security and then putting it into the capital market to raise funding. It is geared towards the long term.
- Prior to securitization, businesses need to be reliable and have sustainable revenue.
- The costs to putting together a securitization are high and thus implies that economies of scale are necessary.
- Bob Marley, for instance, has a track record as a musical figure and one can ascertain the flow of sales and the type of copyrights he has over the years and based on that past cash flow, can model the prospective cash flow that will come and the source of those flows.
- Yet the question remains whether this can be done for other types of artists, especially entrepreneurs/startups who do not have such a track record? For instance, there may be the need to aggregate demand at the association level to have sufficient volume to undergo securitization.
- A framework for the economic valuation of IP is necessary to valuate IP and how to treat them.
- For IP securitization to take place, there needs to be a well-functioning secondary market.
- Aside from aforementioned barriers, there is an issue of awareness in accepting moveable assets. An external consultancy is currently assessing the operation of the SIPPA and may provide further insight.
Next Steps. The data collected from the consultations with stakeholders in Jamaica is being used as input to design feasible project that will strengthen the IP ecosystem by creating the conditions for IP collateralization and securitization that lead to Innovation and Growth in Jamaica, especially amongst the entrepreneurs and SMEs in the creative industries. One of those key conditions, according to project consultant Dr. Winsome Leslie, may be developing a toolkit for training BSOs to support entrepreneurs and enterprises in Jamaica in registering and monetizing (i.e. such as licensing IP, etc.) their intellectual property assets and recording these transactions. Additional potential key project activities include a roadmap for addressing the specific treatment of IP within the SIPPA [[6]], IP valuation guidelines and training, and the development of a financial loan product for utilizing IP as collateral. We also have a strong focus on ensuring women and youth benefit from project implemented through the CCPF.
Digital technology brings numerous opportunities such as online crowdfunding as an alternative form of financing, blockchain for registering and tracking IP and micropayments, artificial intelligence or augmented reality for permitting innovation of business models and new revenue streams. Thus, it is essential to focus on strengthening the IP framework and architecture in tandem with supporting IP holders in accessing and taking advantage of IP based instruments (such as IP collateralization) to support our IP holders seeking to innovate and grow their operations thereby adding more value for society and the economy.
For more details on how Intellectual Property Securitization works, please find here Dr. Fred Aaron’s presentation.
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[1] Benavente, J.M. and Grazzi, M. 2017. “Public Polices for Creativity and Innovation: Promoting the Orange Economy in Latin America and the Caribbean”.
[2] 2013 PROTEQIN dataset and Dohnert, S; Crespi, G. and Maffioli, A. 2017. Exploring Firm Level Innovation and Productivity in Developing Countries: The Perspective of Caribbean Small States.
[3] Collinder, Avia. “Collateral Registry Usage Climbs”. The Gleaner, Feb 13, 2018.
[4] For more information on the Bowie Bond, see reference article here
[5] To read more, see reference cited here
[6] To be closely coordinated with the IFC/World Bank project which is currently conducting a review for strengthening the SIPPA and the collateral registry. Leslie, Winsome. 2018.
