20

Intellectual Property as Securitized Assets
Research Fellow: Hiroyuki Watanabe

The possibility of implementing the securitization of IPRs is extremely restricted due to various difficulties
involved in such securitization. Looking at the overseas cases of IP-related securitization, the real picture wassecuritization of "royalty claims." The few cases of IP-related securitization in Japan are also likely to have been
conducted by taking the royalty claims as reserves in actuality, though they took a form of transferring IPRs to
SPVs. In this respect, the use of limited partnerships would also be appropriate as schemes for IPR-based
investment in venture companies. The fact that acquisition of beneficial interest in trusts became permissible forlimited partnerships with the recent amendment of law has also helped to expand the scope of limited
partnerships' investment in IPRs. However, in order to make this scheme fully functional, early law
improvement is desirable so that use of IPRs for trusts in the course of trade would become permissible.

Securitization(*1) means "a company, etc.
transfers specified assets that it owns to a vehicle
that is newly established for the purpose of holding
assets (called "special purpose vehicle; SPV") andraising funds backed up by cash flows arising fromtransferred assets through the SPV." It is arevolutionary financial means of raising funds bytaking only specific assets as reserves instead ofthe entire asset base of the fund-raiser.
This securitization method, which wasdeveloped in the United States in recent years, hasgrown considerably in terms of popularity, and thetype of assets securitized has also diversified. Sucha trend has also been observed in Japan. With adramatic increase in securitization, the type of
securitized assets has also shown great
diversification, and the possibility of securitizing"intellectual property (IP)" has come to be seen as
advantageous in various quarters.
In light of this situation, this report looks into
"IP as assets subject to securitization".
1

Mechanism of Securitization

For successful securitization, assets are
required to be transferred to the SPV (true sale) inorder to isolate the transferred assets from theoriginator's credit risk (bankruptcy remoteness).
A special purpose vehicle (SPV) is anindependent legal entity that is established for the
purpose of securitization, generally in the form of a
special purpose company (SPC), trust, partnership,
limited liability company, or stock corporation.
In a typical case of securitization, a SPV issues
corporate bonds backed up by the transferredassets, pay proceeds from bond issuance to theoriginator as consideration for the asset transfer
while paying all principals and interests to bondinvestors from cash flows arising from the assets.
In reality, securitization schemes are often
implemented by non-resource loans, a method foroffering loan by taking only the SPV's own assets asbacking without issuing corporate bonds or othersecurities (limiting the scope of liable property thatserves as reserves for debts to specified assets andsubstitutes equivalent to the value thereof).
2

Expansion of the Size of Securitizationand the Scope of Assets Securitized

Securitization has become considerably
popular in the United States where it wasdeveloped; in 2001, the amount of asset-backed
securities issued in the United States was 2.9
trillion dollars (265 trillion yen), far beyond theamount of straight corporate bonds issued (880billion dollars). Assets available for securitization
have also been diversified to include lease credit
claims and mortgages, and securitization of
intellectual property (IP) also plays a part in such
expansion of the scope of assets securitized.
Even in the United States, however, IP was
not securitized in the past due to the uncertainty incash flow forecasts although it was sometimes usedby venture companies as security for financing.
Under such circumstances, in January 1997, David
Bowie, a U.K. rock star, issued bonds backed by theroyalty claims for his music works, and raised 55
million dollars in the U.S. financial markets. Thiscase is recognized as the first IP securitization.
The full opening of the age of securitization in
Japan was the establishment of a framework for(*1) Securitization is often translated as "証券化" or "証券化・流動化" in Japanese. However, in the case of securitization in a
broad sense, schemes are often implemented by non-resource loans, a method for offering loans only taking the SPV's own
assets as reserves without issuing corporate bonds or other securities. In light of this, in the Japanese version of thisreport, securitization is translated as "資産流動化" or "流動化."

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securitization of lease credit claims upon theenactment of the Law Concerning Regulations ofBusiness for Special Credits (the "Special Credit
Law") in 1993. As the scope of assets available forsecuritization gradually expands (it should beparticularly noted that limitation on the scope of
assets available for securitization was lifted upon
the revision of the Securitization Law in 2000), theamount of asset-backed securities issued increased
considerably. In fact, a variety of assets haveactually been securitized in recent years, such as
railway cars, automobiles, vessels, computers, andmedical equipment as movable property, and officebuildings and hotels as immovable property.
The amount of asset-backed securities issued
in Japan in FY2002 reached about 4.6 trillion yen,growing far beyond the amount of capital stock
issued.
The trend of IP securitization in Japan beganwith the securitization of the ground-based
broadcasting right (a type of copyright) in 2002, andthe first attempt of securitization of a patent right
was made in 2003.
In the earlier case, Shochiku Co., Ltd., a film
company, granted TV Tokyo Corp. theground-based broadcasting right for 34 films that
had yet to be aired from among a total of 48 of the
popular serial films "It's Tough Being a Man." The
SPC, having obtained this content copyright from
Shochiku, raised funds from the Industrial Bank ofJapan, by offering the royalties for the ground-based
broadcasting right from TV Tokyo as backing.
In the latter case, Scalar Co., a venturecompany holding multiple patents relating to opticaltechnology and engaged in the development of
optical lenses, had granted an exclusive license forfour patent rights that it owned to Pin Change, Co.,
Ltd., a venture company within Matsushita ElectricGroup. Scalar transferred these patent rights to the
SPC and then SPC issued corporate bonds andraised funds backed up by the royalties for thepatent rights.
3

Points to Be Noted and Problems
Concerning "IPR" Securitization

Points to be noted and problems concerning
IPR securitization may be roughly divided into
those relating to: (1) the characteristics of theassets to be securitized; (2) the transfer of assets tobe securitized; (3) credit enhancement; (4) issue of
securities; and (5) the handling after the
implementation of the securitization.
The first point is related to the characteristicsof the target of IP securitization. In almost all cases
where securitization seems to be implemented for
IPRs, the assets that are actually targeted areroyalties for the IPRs. To specify the assets to be
securitized, it is necessary to correctly identify the
relationship between the IPRs concerned and third

parties' rights.
Secondly, there are many problems concerning
the transfer of assets to be securitized, including (i)transferability, (ii) true sales, (iii) effectivenessagainst third parties, (iv) risk of cancellation of alicense contract, and (v) evaluation of the IP
concerned. In relation to the issue of transferability,
consent should be obtained from the parties
concerned when securitizing exclusively personal
rights (e.g. the moral right of an author) or
jointly-owned rights. The issue of true sales issummarized as to what extent the originator isallowed to continue to have involvement in the
securitized assets.
As for the issue of effectiveness against third
parties, registration is required for a patent right,
utility model right, design right, and trademark
right to take effect whereas registration is required
for a copyright and right of layout-designs ofintegrated circuits to become effective against third
parties. Risk of cancellation of a license contract
means that, in the event of the bankruptcy of thelicensor, the administrator might cancel the license
contract. The issue of evaluation arises when there
is no market for the IPR concerned and therefore itis difficult to assess the correct amount of cash flowthat will be generated from the IPR. There is also arisk that a patent right might become invalid andlose its effect.
The third point relates to credit enhancement.
In the case of an IPR to be generated in the future,
it is so difficult to evaluate the risk of the failure tocompletely establish the IPR that even a credit
enhancement such as insurance would not pay due
to the high insurance premium rate.
The fourth point is concerned with how tobalance disclosure to investors with confidentialityof technical information when issuing securities.
Finally, there are points to be noted after the
implementation of the securitization, such as how
to treat patents of improvements and include themin the scope of assets to be securitized, and how tohandle the payment of annual fees for patents.
Consideration is also required regarding the
involvement of the originator in the event of an
infringement of the IPR, and how to cope with theissue of true sales where the originator is actually
involved.
4

Costs and Benefits of Securitization

The fact that a certain IP or IPR issecuritizable does not always mean that the
securitization scheme for the IP or IPR functions
well. Consideration should be given from theperspective of "cost benefits of securitization."
The asset to be securitized must have areasonable size. As a considerable amount of costs
are usually needed to build a securitization scheme,
the amount of fees to be paid to a law firm or● 143 ●IIP Bulletin 2004

accountant's firm is expected to be large accordingly.
For this reason, in Japan, the standard amount ofasset to be securitized, which may indicate thebreak-even point, has been recognized as ranging
from 2 to 10 billion yen. This seems, however, to be
set based on the scheme in which credit
enhancement is adopted for the purpose ofprotecting investors against loss or obtaining a highrating for securities issued. In any case, it isunquestionable that the IP to be securitized isrequired to have reached a reasonable size.
The Scalar case, the first case of securitizationof patent rights in Japan, should be highly regarded
as a securitization scheme that was successfully
composed, but it should be noted that thissecuritization was an "experimental" case carriedout by members of the ministerial workshop. The
amount of funds actually raised throughsecuritization was only about 200 million yen, andfor such an amount, it would normally be difficult toacquire benefits that are sufficient to cover thecosts to be paid to professionals in law, accounting,tax, and financial affairs, which are considerednecessary for setting up such complicatedschemes.(*2) Though adopting a form of
securitization by transferring the patent rights to
the SPV, the scheme, when viewed as a whole,seems to have raised funds by offering royalties tobe paid by Pin Change as substantive reserves.
In the Shochiku case, the first case of IP
securitization in Japan, securitization of royalties
was initially considered, but out of concern for legal
instability as to how the license contract would be
handled in the event of the originator's bankruptcy,
the scheme of transferring the ground-based
broadcasting right per se was finally chosen.

organization.
Furthermore, there are some cases in which
the royalty claims for film copyrights and theroyalty claims for design rights or trademark rights
have been securitized.
The detailed schemes for most of thesesecuritization cases are unknown since accessible
records are extremely limited, but funds often seemto be raised by issuing privately-offered corporate
bonds. Even though the bonds are privately-offeredin form, some of them are practically loans, such as
those that are underwritten by a single institutional
investor like a life insurance company. Also,
securitization by a non-recourse loan in which IP or
IPR is transferred to the SPV, whereby a loan isprovided taking only that asset as a reserve, seems
to be one of the basic patterns used.
The securitization schemes can be categorized
as follows:(i) issuance of publicly-offered corporate bonds(typical securitization);(ii) issuance of privately-offered corporate bonds;(iii) privately-offered bonds that are practicallyIP-backed loans (e.g., privately-offered bonds
underwritten by a single institutional investor); and(iv) non-recourse loans collateralized by IP (IPR).
In addition to these, (v) a scheme of
securitizing rights in small portions could also be
added.However, since this scheme does not
sufficiently secure bankruptcy remoteness of theassets at all and the investors would directly bear
any risk concerning the assets, it would be better todistinguish this scheme from securitization.(*3)
As far as the author can confirm, the cases of
IP-related securitization overseas are allcategorized under schemes (ii) to (iv) above.(*4)

56Overseas Securitization of IP

Pure IPR securitization is also rarely seen
abroad and most cases seem to involve
securitization of royalty claims. In most of thesecases, the assets securitized are the royalty claims
for music copyrights. While they are generally
royalty claims for music copyrights of individual
artists, some are royalty claims for music
copyrights owned by music publishers (TVT
Records, Corinthian Group). In addition,
securitization by SESAC is unique in that the
securitized assets are the royalty claims for music
copyrights owned by a copyright management

Finance for Venture Companies andAsset Securitization

If IP can be securitized, the company that
implements
securitization(originator)
candistinguish the evaluation of the IP from theevaluation of the company and raise funds based on
the IP's credibility and cash flows. For this reason,
IP securitization is expected to bring about
particularly large benefits to venture companies.
Generally, venture companies do not have a lotof tangible assets such as land, buildings, andmachinery/equipment, and it is quite often the casethat most of their assets are IP. In many cases, they(*2) Unlike a home appliance product or similar that requires a large number of mutually related patents for a single product,
the number of patents used in a single product was relatively small and that played a decisive role in commercialization of
the product in the Scalar case of patent securitization. This is considered to be one of the important factors that enabledpatent securitization in this case.
(*3) The Tokimeki Memorial case, which is often cited as an example of IP-related securitization in Japan, is not a case of asset
securitization but a case involving investment trust.
(*4) Apart from these, there are only a few cases using the "whole business securitization" scheme, and they are mainly in the
United Kingdom.

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have difficulty in raising funds for their businessbecause they have yet to fully develop or acquiresufficient creditworthiness, even though they haveadvanced technology or original know-how. Under
such circumstances, there is strong demand for amechanism in which such venture companies will
be able to raise funds based on their IP that is
independent from the evaluation of the company,
and in this respect, IP securitization is recognized
as an effective method.
However, in the case of a venture company, its
cash flows cannot be counted on and its liquidation
value is also low. Furthermore, high risk due toextremely high uncertainty of its business will
inevitably result in high interest rates.
Consequently, considering venture companies' highdemand for funds (to be largely invested in R&D
projects) and high uncertainty, equity financing
without a definite repayment deadline seems to be
more suitable for them than debt financing with adefinite deadline.
However,financingthrough
equityinvestments by venture capitals is often
inappropriate for venture companies that are notexpected to go public or most small andmedium-sized enterprises (SMEs) in which theowner-manager wants to maintain the management
right.
In this respect, there is a scheme to invest in
private equity called the "private equity fund."However, the private equity fund is mainly used forbuying and reviving a failed company or business or
one in financial difficulty, and gaining a return by
selling it, so it is actually closer to "businessrevival" or "business management," and would
exceed the scope of an "investment" scheme.
Nevertheless, if an investment scheme is to be
set up while carrying out the various management
and maintenance tasks, and responses toinfringement related to IPR securitization that havebeen discussed so far, it would be closer to"business management," so a scheme using theprivate business fund would be more appropriate.
Indeed, IP investment schemes having the natureof private equity funds have already begun to be set
up in Japan.
On the other hand, one possible method tomeet venture companies' financing needs while
enabling investors to make profits would bereceiving returns not only from public sales ofshares of the invested companies but also from cash
flows that will be generated from the businessitself.
Accordingly, attention will be drawn tocorporate finance through investments aiming forprofits arising from the business, rather than
through debt or equity financing. The use of limited
partnerships would be appropriate as investment
schemes.
A limited partnership for investment, apartnership under the Law on Limited Partnershipfor Investments enacted in 1998, can be establishedin accordance with the legal provision that limited
partners, who do not engage in operating thepartnership, shall only be liable within the limit of
the amount of their contributions. This partnershipsystem is intended to encourage various types ofinvestors to supply funds for venture companies.
Within the scope of its operation, a limited
partnership is allowed to obtain and own venturecompanies' IPRs. If a limited partnership is also
allowed to use the trust system for IPRs, theusability of such a partnership in investment
activities will increase significantly. The investment
scheme through IPR trust is expected to become
available upon the revision of the Trust Law, which
will be deliberated in the ordinary session of theDiet in 2004. If it becomes possible to operate an
IPR trust as a commercial trust, IPRs will be more
effectively used as assets under the scheme
through a limited partnership.
7

Conclusion

As a result of the study in this report, it was
confirmed that various difficulties are involved insecuritization of IPRs. Underlying these difficulties
is the essential nature of the rights themselves,
such as the individuality of the respective IPRs andthe exclusive rights to use without ownership.
Of course, it may be possible to make IPR
securitization successful by resolving these
problems, but the applicable scope would be
extremely limited, only including cases in which theright itself can be easily divided or in which a small
number of IPRs are directly linked tocommercialization of the product. Furthermore,enormous costs are usually required to build asecuritization scheme, so the volume of the
securitized assets needs to be extremely large.
Looking at the overseas cases of IP-related
securitization, the real picture was securitization ofroyalty claims. The few cases of IP-related
securitization in Japan are also likely to have been
conducted by taking the royalty claims as reservesin actuality, though they took the form oftransferring IPRs to SPVs.
In this manner, asset securitization is notsuitable for raising funds by use of IPRs. On theother hand, royalty claims could be used in cases of
securitization in the future to a certain extent,
although there are various points to be noted andproblems compared with general money claims,
since they derive from IPRs.
Recently while IPR-based investment inventure companies is drawing public attention andis being considered as a national economic issue,
the use of limited partnerships would also beappropriate as investment schemes. The fact that
acquisition of beneficial interest in trusts became● 145 ●IIP Bulletin 2004

permissible for limited partnerships with the recent
amendment of the law, has also helped to expand
the scope of limited partnerships' investment in
IPRs. However, in order to make this scheme fully
functional, early law improvement is desirable sothat use of IPRs for trusts in the course of trade
would become permissible. Nevertheless, evenunder the current law, it would be possible to use ascheme in which a limited-liability intermediate
corporation(*5) acts as the trustee.
The examination in this report only provides
the initial groundwork for the study of IP and IPR
as assets, and needs more detailed consideration,
particularly with regard to the individual issues.
Furthermore, when actually building an investment
scheme based on the views in this report, a moredetailed review would be required from practicaland theoretical viewpoints. The author would liketo expand the research base on the issues andtopics covered in this report by gaining advice fromvarious quarters.

(*5) It is completely different from a "limited partnership for investment."

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