Earlier this year, the IP Wales project at Swansea University released a report on Patent Prospecting on the Alternative Investment Market (AIM) that indirectly points out a problem with the U.S. financial system.
First a note of explanation. The Alternative Investment Market (AIM) is, as its website points out, “the London Stock Exchange’s international market for smaller growing companies.” Companies listed on the AIM face lower listing and regulatory requirements than those on the main exchange and they tend to be seen by some as more speculative investments. While technology companies are listed on the AIM, so are a number of companies from other occasionally speculative sectors such as oil & gas and mining.
The study looked at patenting activity of 79 selected companies on the AIM. What is especially interesting to me is their finding on use of patents for collateral.
Licensing is not the only way to address investor demands to extract added value from a companies’ patent portfolio and we found interesting evidence to demonstrate that patents can and have been used in the raising of capital. Whilst the number might be comparatively small it is worthy of note that over 10% of the patent investment prospects we identified related to patents in which a security interest had been taken. Although the majority of the companies holding these patents were not based in the US, all related to US patents and the vast majority related to US State security agreements. This finding needs to be read in conjunction with a recent report commissioned by the UK Intellectual Property Office Banking on IP? The role of intellectual property and intangible assets in facilitating business finance (2013). Whilst this Report does not advocate changes to the current UK legislative framework it does recommend changes in practice when it comes to the registration and tracking of security interests in intangible assets. Our Report provides evidence to suggest that the US practice of ‘perfecting’ security interests in patents demonstrates a good understanding of these issues.
[Note: for more on the UK IPO study Banking on IP?, see this earlier posting.]
Unfortunately, the study does not give any detail. It is unclear exactly what type of security interest was involved. Was this part of an all-asset lien? Was the patent specifically used as collateral? At what loan to value ratio?
I also have to take exception with the last statement that the U.S. system of perfecting security interests “demonstrates a good understanding of these issues.” The study unwittingly highlights a problem with the U.S. system. As we pointed out in our report Intangible Asset Monetization: The Promise and the Reality, recording of a security interest in a piece of property is handled at the state level under the terms of Article 9 of the Uniform Commercial Code (UCC). This requires the filing of a UCC-1 financing statement in the state. The footnotes to the UK study give us an example of how recording of security interests are spread among various states, including the need to record the security interest in multiple states. For example: “Environ. Recycle (ENRT) Oklahoma & Illinois security agreements in patent records US5277758A, US5268074A, US5285973A, US5351895A, US5213021A & Georgia security agreements in patent records US5540244A, US6149012A & Ohio security agreement in patent record US6387175B1.”
The security interest may also be recorded at the US Patent and Trademark Office (USPTO), but is not required. However, since there is some continued confusion about federal preemption over the UCC in the case of patents, it is considered best practice to record the security interest at both the state-level and with the USPTO.
Because of this system, it is not always clear that an investor can find all the security interests that lay claim to a particular patent. Those claims may be recorded at the USPTO, or may not be. The only way to be sure is to search the records in every state.
Whether this has created a disincentive for banks to lend on patents is unclear. After all, banks have been dealing with the state-level recordation of liens for a long time. But there is a difference between recording a security interest on a house or a car where the physical location of the owner (and hence the state in which the security interest is recorded) and a patent (which could be “located” anywhere). At a minimum we should think about ways to link state UCC filings on IP to a centralized databank at the USPTO. Such a database would remove at lest one small bit of uncertainty in the process of utilizing intangibles in the financial system.
Tip of the hat to the IAM blog for highlighting this report.