Utilising IP as Security for Financing in South Africa

Abstract

Companies or Small Medium Enterprises (SMEs) have the ability to raise funding for their objects either by selling their shares or through direct debt finance which means approaching banks or financial institutions for external financing. These financial institutions or individual creditors such as moneylenders, in order to mitigate their own risk, would typically require some form of security or collateral which could be in form of tangibles such as land, buildings or intangibles such as stocks, shares and intellectual property.

Intellectual Property (IP) are creative works which reward creators with exclusive rights which often yield economic value, the purpose is to provide an incentive for these creators to innovate more. IP are intangible assets which are ‘non-monetary assets which are not identifiable and without physical substance’ (either being separable or arising from contractual or other legal rights).[1] IP can be defined as

A category of intangible rights protecting commercially viable products of the human intellect. The category comprises primarily trademark, copyright and patent rights, but also includes trade-secret rights, publicity rights, moral rights and rights against unfair competition.[2]

The value of IP cannot be overemphasised, for instance, the top 100 brands in the world in 2021 account for a worth of $ 7.1 trillion which is equivalent to the combined GDP of France and Germany, the top three brands Amazon, Apple and Google are worth $684 million, $612 million and $458 million respectively.[3] IP securitization is quite common in music and film industry for instance David Bowie in 1997 issued 10-year asset-backed bonds on the basis of future royalties on publishing rights and master recordings from 25 pre-recorded albums, and raised US$55 million. The purchaser of the bonds gained the right to receive future royalties from Bowie’s albums until the principal plus 8% annual interest was repaid.[4]

This paper examines the nature and classification of IP and the various ways security interests could be created over various forms of IP in South Africa. It examines the various challenges that could be faced in the utilisation of IP as security especially with regards valuation and it recommends possible ways to enhance the utility of the value of IP through securitisation.

[1] International Accounting Standards ‘IAS 38 — Intangible Assets’ available at https://www.iasplus.com/en/standards/ias/ias38 accessed on 17 September 2021.

[2] BA Garner and HC Black ‘Black’s Law Dictionary’ 9^th Edition (2009) at 960.

[3] Nathalie Burdet ‘What are the most valuable global brands in 2021?’ available at https://www.kantar.com/inspiration/brands/what-are-the-most-valuable-global-brands-in-2021 accessed on 17 September 2021.

[4] WIPO ‘Intellectual Property Financing- An Introduction’ available at https://www.wipo.int/wipo_magazine/en/2008/05/article_0001.html accessed on 17 September 2021.