IP Valuation and Use of IP as Collateral
‘IP valuation’ can be simply defined as an assessment of Intangible assets’ value by using some particular methods. Most of the time, this type of asset has been unfortunately ignored by several entrepreneurs when it comes to a takeover or acquisition; comparing to physical assets such as machinery , lands and buildings which has normally been responsible for determining the enterprise’s value in the market place. In other words, when an entrepreneur intends to sell a company which owns a trademark, copy right or patent; the cost of such intangible assets might somehow be overlooked.
As a matter of fact, intellectual property acquires an exclusive and concrete value much more than what most of people are aware of. Since the world we live has become the information Age in which media, technology, computers and robots are vital in every aspect of lives, possessing of IP assets is becoming the key to greater competitiveness and not only value of the enterprise, but also value of products in sale markets. For examples, if a company invents a patentable technological device which enhances a system of smartphone, the company will be able to exploit the IP asset by selling smartphone which contains the invented device and licensing its patent to other alliances who wish to install the device into their products. There is no doubt that the company can obviously make lots of profit and income from the patentable device which may lead the company to a greater business opportunity in the future. It therefore can be concluded that ‘the more a company obtains IP assets, the more valuable the company becomes.’
Apart from direct utilization of IP assets as mentioned, IP valuation has recently become one of the new options among business owners in Thailand who are knowledgeable and keen to increase the value of businesses; utilize or take advantages from the assets to the best since the enactment of The Business Security Act as B.E. 2558 (2015) in Thailand.
A recent major development in the field of guarantee is the adoption of The Business Security Act (the “Act”) as B.E. 2558 (2015). Under Section 8, one of the prominent points of the Act is that it allows Intellectual Property (IP) to be used as collateral as the security to financial institutions. It establishes a new method of placement of security by not requiring the asset be transferred to the obligee, allowing the IP owner to continue manufacturing products or providing services under their intellectual assets. The Act will not only benefit the obligors or security providers, but it also benefits the obligees/lenders or security receivers in terms of security execution and the preferential right over the assets before other ordinary obligees.
IP valuation as collateral has been one of the controversial issues nowadays. Some of local IP professionals believe that the possibility of having any intellectual assets as collateral is unlikely. In fact, it would be nearly impossible in practice to provide IP as collateral to the lenders, for example, commercial banks in Thailand, due to the fluctuation of its value, dependent on the current standing of the owner’s business, economy, politics and advance technology, as well as the lack of IP valuators. It would be difficult to evaluate the value of IP as it tends to be much more unstable and unpredictable comparing to valuation of other properties such as property, plant and equipment. To make this type of assessment practical and sustainable in terms of business, it is necessary to have a long-term IP financial scheme.
First of all, the owners should be aware whether the type of asset is applicable as collateral in Thailand. All kinds of Intellectual Property that can be secured in a bank and/or financial institution must be registered or successfully declared at Department of Intellectual Property (the “DIP”) regardless of its being subject to the statutory registration requirement. It should also be noted that the Act applied for the obligee that is financial institutions or other entity as prescribed by law, and not between private entities. While trademark and patent is subject to the statutory registration and is on DIP’s record, some other IP such as copyright and trade secret are automatically protected, causing difficulty on burden of proof on the true ownership and the subsequent problem in using it as collateral. In order to use such IP as collateral, the owner is required to proceed with the ownership declaration with DIP to obtain the written record of such IP before offering the intangible assets to the bank as collateral.
Furthermore, the owners should also the real value of their intangible assets and take it into consideration. As this type of valuation is somewhat complicated to be estimated, IP valuators will perform a key role of this asset’s assessment by using technical evaluation. In general, the value of intangible asset is the ability or quality that the asset could benefit and utilize in the industry and its economic value. IP valuators usually assess the present income the assets is generating, future value of business’s cash flow, miscellaneous risk factors involving the business and the use of IP assets, as well as a business plan (marketing plan) of the asset’s owner. In addition, several unique variables of intangible assets such as royalty fees, protection period and specific characteristic of the assets should also be taken into account in the determination of its value.
Once the owners acknowledge the cost of such property, the next step is to proceed with the legal process for the use of IP as collateral. The obligor is required to propose their long-term financial scheme, business projects and other supporting documentation to an obligee. The obligee will then examine the status of such assets whether it is subject to seizure, execution, ongoing litigation or is placed as collateral at other financial institution as well as consider the value of the Intellectual property proposed as a collateral. This phase is likely subject to the discretion and criteria of the obligee.
After receiving the approval or confirmation from the obligee that it agrees to accept IP as the collateral, in order to validate the use of Intellectual Property as collateral, the obligee must enter into a business security agreement in writing with the obligor, then apply for the registration with Department of Business development (the “DBD”), Ministry of Commerce, Thailand. The DBD will perform an important role in the field of business security as it acts as an intermediary of the registration process and the important part of the process of effecting the foreclosure.
After the registration, the obligor is entitled to use, exchange, dispose, mortgage (but not pledge) or use it as a collateral for other obligation, subject to the duty of care by the obligor which includes the preparation of record books and the inspection by the obligee. The obligee is entitled to preferential rights over the IP collateral upon the foreclosure and, if the IP was also placed as collateral under other law, to foreclose the IP under the Act or under other law. The rights of obligee to foreclose the IP is subject to the operative provision of the Act. In addition, there is a criminal offence for failure to comply with the material provision under this Act.
In Thailand, SME becomes a major sector and workforce of the nation’s economy since the number of SME amounts to 95 percent of all types of business enterprise, with more than 50 percent of total employee workforce . The question of ‘Does Using intangible properties as collateral actually provide a greater opportunity to Thai Small and Medium Enterprises (SME) or Microfinance to access to financing fund and to develop business?’ is challenging for the SMEs with the IP seeking access to capital with the financial institution.
With the opportunity provided in this Act, intangible assets should be treated in a manner that not only it is allowed to be used as a collateral, but it also increases the company asset’s value which may provide a more concrete collateral and easier negotiation with a bank or financial institute for financial loans/facilities or credits. It is expected that the Act will provide benefit to all segment of the economy that, in surn, will contribute to the boost-up and expansion of Thailand’s economy. Since the use of IP as a collateral is yet to become widespread and the practical operation has not seen the major issues, it may be the best to look forward towards the further recognition and application of IP collateral in the future.
‘IP valuation’ can be simply defined as an assessment of Intangible assets’ value by using some particular methods.