Working Paper #03

Intangible Asset Monetization
The Promise and the Reality

Kenan Patrick Jarboe
Roland Furrow
Athena Alliance

April 2008

About Athena Alliance
Athena Alliance is in the vanguard of identifying, understanding, analyzing, and educating on theinformation, intangibles, and innovation (I3 or I-Cubed) economy. Information, knowledge, andother intangibles now power economic prosperity and wealth creation. Intangible assets—worker
skills and know-how, informal relationships that feed creativity and new ideas, high-performancework organizations, formal intellectual property, brand names—are the new keys to competitive
advantage. Intangibles and information drive our innovation process, a combination of formal
research and informal creativity. These elements combine to produce productivity andimprovement gains needed to maintain prosperity.
While the economic rules have changed, public policy has not caught up. Governments are
struggling with ways to utilize information, foster development of intangibles, and promote
innovation and competitiveness in this new economy. Policymakers are grappling with the urgent
need to frame policy questions in light of the changing economic situation.
Issues of developing and utilizing information, managing intangibles, and fostering innovation
underlie discussions on a variety of subjects, such as intellectual property rights, education andtraining policy, economic development, technology policy, and trade policy. Crafting new
policies in these areas requires infusing a better understanding of intangibles and the information
economy into the public debate.
As a nonprofit public policy research organization, Athena Alliance seeks to close the gap
between the changed economy and current public policy through activities to reshape the debate
and craft new solutions. Recent activities include working with the District of Columbia to create
an innovation-led economic development strategy; co-hosting Congressional luncheon briefings;
co-hosting a DC-based conference on innovation in India and China with the National Academyof Sciences; co-hosting a New York City-based conference on the financial reporting andintangibles with the Intangible Asset Finance Society; and publishing policy reports on intangible
assets, including Reporting Intangibles (2005) and Measuring Intangibles (2007).
Athena Alliance Board of Directors
Richard Cohon, President, C.N. Burman Company LLC—Chairman
Kenan Patrick Jarboe, Ph.D.—President
Joan L. Wills, Director of the Center for Workforce Development, Institute for Educational
Leadership—Secretary/Treasurer
Jonathan Low, Partner and Co-Founder of Predictiv, LLC—Board Member
Acknowledgements
The authors would like to thank the many people who reviewed drafts of this paper and/or
provided invaluable insights and comments, including Richard Cohon, Jonathan Low, Mary
Adams, William Murphy, Mary McCue, Kimberly Cauthorn, Ian Lewis, Marc Lucier, Clark
Eustace, Matthew Hogg, Doug Elliott, Jay Eisbruck, Rory Radding, Annabel Bismuth, Weston
Anson, Nir Kossovsky, and Erika Fitzpatrick. The authors would also like to specificallyacknowledge the early work on this paper by Natividad Lorenzo, who provided important
foundation research for the project. Any errors or omissions are solely the responsibility of theauthors.
This work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative
Works 3.0 United States License. To view a copy of this license, visit
http://creativecommons.org/licenses/by-nc-nd/3.0/us/.

Table of Contents
Table of Contents…………………………………………………………………………iii
Executive Summary……………………………………………………….........................v
Introduction... ……………………………………………………………………………..1
What are Intangible Assets and Why are They Important? ................................................ 3
What are Intangible Assets? ............................................................................................ 3
Why are Intangibles Important? ...................................................................................... 4
Do Intangibles Matter to Corporate Strategy? ................................................................ 5
Financing Intangibles and Innovation ............................................................................. 6
Legal and Regulatory Frameworks Governing Intangible Assets ...................................... 8
Financial Accounting Standards...................................................................................... 8
U.S. Accounting Standards.......................................................................................... 8
SEC Disclosure Requirements..................................................................................... 9International Accounting Standards (IAS) ................................................................ 10
Taxing Intangibles......................................................................................................... 11
On the expenditure side ............................................................................................. 11
On the income side .................................................................................................... 13Intellectual Property Rights........................................................................................... 17
Patents........................................................................................................................ 17
Copyright ................................................................................................................... 18
Trademarks (the Lanham Act)................................................................................... 19
Trade Secrets ............................................................................................................. 20
Federal Technology Transfer..................................................................................... 21
Intellectual Property and International Law .............................................................. 21
Intellectual Property and Antitrust............................................................................. 22
Contract Law and Noncompete Agreements ............................................................. 22
Perfection and Bankruptcy Laws .................................................................................. 23
Securities and Banking Regulations.............................................................................. 25
Financial Markets and Intangible Assets .......................................................................... 27
Classification of Intangible Assets ................................................................................ 28
Monetization Options.................................................................................................... 29
Equity Markets........................................................................................................... 29
Licensing.................................................................................................................... 31
Sale of IP.................................................................................................................... 33
Banks and Loans........................................................................................................ 34
Asset-backed Securitization and the Securities Market............................................. 38
Ratings Agencies and Credit Enhancement............................................................... 43
Venture Capital .......................................................................................................... 44
Interplay of Mechanisms ........................................................................................... 45
Financial Considerations................................................................................................... 46
Classification and Valuation ......................................................................................... 46
Asset Recognition...................................................................................................... 47
Separability ................................................................................................................ 48
Transferability............................................................................................................ 48
Duration ..................................................................................................................... 49

Risk Analysis ............................................................................................................. 49
Insurance ................................................................................................................ 51
Valuation.................................................................................................................... 52
Markets and Liquidity ................................................................................................... 54
Cost of Capital............................................................................................................... 56
Obstacles and Policy Proposals ........................................................................................ 59
Obstacles ....................................................................................................................... 59
Inadequate Information: reporting, measurement, and valuation .............................. 60
Imperfect Market Structure........................................................................................ 61
Perfection and Priority Claims ............................................................................... 61
Ownership and Risk ............................................................................................... 62
Treatment of Intangibles in Existing Rules and Regulations................................. 64
Transaction Costs (Due to Uniqueness of the Deal) .............................................. 64
Insufficient Supply..................................................................................................... 65
Policies .......................................................................................................................... 67
Identification and Disclosure..................................................................................... 67
Valuation Standards................................................................................................... 71
Regularizing the Market ............................................................................................ 74
Market Oversight ....................................................................................................... 76
Perfection ................................................................................................................... 78
Tax Incentives............................................................................................................ 79
Patent Reform ............................................................................................................ 81
Spurring Licensing and Facilitating Sale................................................................... 84
Facilitating Bank Lending ......................................................................................... 85
Conclusion ........................................................................................................................ 87
Appendix A. Lists of Intangible Assets According to Different Standards...................... 89a) Financial Accounting Standards Board—SFAS 141 ................................................ 89b) AICPA—American Institute of Certified Public Accountants ................................. 90c) Low/Kalafut List of Intangibles to Company Performance ...................................... 91
Appendix B. Special Purpose Entities (SPEs) .................................................................. 92
Appendix C. Possible Policy-Related Actions.................................................................. 94
Endnotes............................................................................................................................ 97

Executive SummaryThe economy of the United States is now largely driven by intangible assets. Theseassets include worker skills and know-how, innovative work organizations,business methods, brands, and formal intellectual property, such as patents andcopyrights. They are producing an economy very different from the one of the past. As
the U.S. moves away from a manufacturing-based economy and toward a technologyand-innovation driven one, intangible asset investments are becoming vital to economic
growth and sustainability. Just as physical assets were used to finance the creation of
more physical assets during the industrial age, intangible assets should be used to financethe creation of more intangible assets in the information age.
Intangible assets show up in the financial system in various ways. They are valued—
often implicitly, sometimes explicitly—in financial markets by analysts, in stock prices,in ratings by credit agencies and for private lender programs. Mechanisms for raising
capital based on intangibles already exist, including securitization, lending, licensing, andoutright sale. Recent financial innovations have better captured intangibles in thefinancial markets.
But the evolution of robust capital markets that both utilize and support intangibles has
been slow. Intangibles are still not can be considered on the balance sheet nor given due
credit for playing a vital role on the income statement. Intangible assets have nostandardized financial tools to capture their value. Each intangible asset financing deal
seems to be a unique, one-off event employing differing models to determine the assets’value. The associated perceptions of risk—in some cases exacerbated by actual events,
such as the subprime mortgage meltdown—have greatly hampered the utilization of
intangibles in capital markets.
As a result, companies are missing substantial capital resources that could be used forbusiness expansion or innovation investment. To effectively realize the significant
potential of intangibles, industry standards and government regulations need to promote
the acceptance, use, and dissemination of intangible assets in the economy.
A number of factors must be considered by the financial markets to determine thesuitability of an asset, including asset recognition, valuation, separability, transferability,
duration, and risk. However, management and capital markets have failed to solve thevery real problem of valuation, which severely undermines attempts to create financial
leverage for the asset. This valuation deficit must be remedied for businesses and theeconomy to remain fully viable and sustainable over the long term.
Despite these drawbacks, intangible asset monetization could be the key that unlocks avault of unexplored, exciting, and extremely useful sets of financial risk-mitigation
instruments.
A secure, open, transparent, fair, and efficient capital market for intangible assets
depends on government and independent regulatory bodies playing an active role. Yet

Intangible Asset Monetization – Athena Alliancevivery little public or private research exists that clearly explores this asset class. Thus, thegreatest potential contribution from public policy may be to raise awareness andencourage utilization and better understanding of all facets of intangibles.
Beyond this basic need, numerous other actions are required to change the situation.
There is no magic bullet; no single government or industry action will resolve all theissues. But policymakers play a key role in promoting acceptance, use, and disseminationof intangible assets in the market. Areas in need of attention include patent reform,
securities definitions, banking regulations, perfection and bankruptcy laws, technology
policy and tax policy. Industry standards and procedures also need attention, especially invaluation.
Some key policy actions include:•

Reinstate the joint Financial Accounting Standards Board (FASB) andInternational Accounting Standards Board (IASB) research project on expandeddisclosure guidelines for intangibles.

•

Convene a special FASB/Securities and Exchange Commission (SEC) task force
on the valuation.

•

Create a safe harbor in financial statements for corporate reporting of intangible
assets.

•Explore the creation of an Intangibles Mortgage Corporation (Ida Mae) toregularize the intangibles-backed securities market, either as a limited
government-sponsored enterprise (GSE) or as an independent organization.

•

Create a national central registry of intellectual property security interests.

•

Create a permanent knowledge tax credit that would increase investments inintangibles.

•

Explore lowering the tax rate on intangible asset royalties, in conjunction withstricter regulations on international transfer pricing mechanisms and cost-sharing
arrangements and on passive investment companies.

•

Enact patent reform legislation and include a review of patent litigation and patentliability insurance.

•

Review how the federal technology transfer system, including Bayh–Dole, doesor does not facilitate the creation of intangible assets.

•

Review the Basel II Accords to better understand their implications for intangiblebacked lending.

•

Review federal government business loan programs, especially in the small
business arena, to ensure that intangible assets can be used as collateral.

•

Coordinate with ongoing efforts at market reform, such as the President’s
Working Group on Financial Markets, to ensure that intangible-backed assets areproperly included.

Intangible Asset Monetization – Athena Alliancevii

Perhaps the single most important step is the recognition that intangible assets are notcovered in existing financial structures. Our economic policies and regulatory systems,
public and private, are still largely set up to accommodate the tangible assets of theindustrial era—buildings, fixed resources, and machinery. This is not surprising; thesesystems have evolved over the past couple of centuries as the industrial revolution
unfolded.
Today, intangible assets—knowledge, ideas, skills, relationships, and organization—havecome to underpin value creation; their monetization is now essential. But this will require
newly relevant policies and structures that unleash the economy from the strictures of thepast and pave a new way forward for financial success in America and around the world.
The opportunities they portend make the recognition, valuation, and utilization of
intangibles essential to the success of U.S. enterprises and prosperity of the U.S.
economy.

Introduction
The prominence of intangible assets in economic growth and corporate valuation has
never been greater. As companies try to harness innovation and technological advancesand create product and service differentiation, these assets are playing a greater role incorporate investment decisions. Economic performance is gained more by out-thinking
your competitor and less by out-producing him. As the United States moves away from amanufacturing-based economy and toward a technology- and innovation-driven one, theneed for extensive intangible asset investment is vital to economic growth andsustainability.
Yet we are failing to tap into the full potential of these assets, especially as a financing
tool. Investment in the creation of intangible assets in the U.S. is more than $1 trillion
annually.1 The total value of intangibles in the U.S. when measured in 2005 dollars wasestimated at $9.2 trillion.2 However, only a portion of that value shows up in company
financial reports.3 Likewise, intangible assets rarely merit consideration in the financial
system. As a result, companies are missing valuable sources of capital that could be used
for business expansion and innovation.
Compared with traditional fixed assets, intangible assets have been treated muchdifferently by the capital markets, which have historically limited their financing
potential. The unique nature of these assets—underscored by transferability difficulties
and valuation challenges—has limited borrowing capacity and driven up finance costs.
To overcome obstacles to investing in intangible assets, government intervention will
likely be needed to encourage capital markets to support and invest in this asset class andconsequently to free up its enormous potential. Increasing investment will require tapping
into the financial enhancement possibilities inherent in any asset. Evidence is emerging
that both the government and the private sector recognize the significance of intangible
assets, but the means for leveraging their extraordinary value have been slow tomaterialize.
That is not to say that monetization of intangible assets is a completely new phenomenon.
Intellectual property (IP) has long been used as loan collateral. The first trade secrets casein the United States involved the debt on a bond secured in part by a secret chocolatemaking process in 1837.4 In 1884, Ara Shipman loaned Lewis Waterman $5,000 to start a
pen-manufacturing business, secured by Waterman’s patent.5
Today, the law firm of Buchalter Nemer can begin a newsletter on the subject with thefollowing statement:
It is common practice for lenders to extend credit to their customers that require
their customers to use their intellectual property (such as copyrighted material,
trademarks, or patents) as collateral.6
Intangibles traditionally have played a significant yet largely unspoken role in financial
activities. Market analysts spend as much time in their reports considering intangibles,such as managerial experience and technological know-how, as they do calculating

Intangible Asset Monetization – Athena Alliancefinancial statistics. Investors have started to carefully measure company metrics like
corporate culture, stakeholder relationships, environmental practices, and governanceratings when choosing where to place their money. In recent years, innovative financial
products like intellectual property securitization have emerged to capture values neverbefore realized from these important assets.
These financial innovations are, however, still insufficient to bring about robust capital
support of intangibles. Many intangible assets have no standardized financial tools to
capture their value. Furthermore, the value of most intangibles has never been
regularized; the lack of a universal valuation model for intangibles may serve as asignificant impediment to capital market usefulness. While progress has been made, thepromise of unlocking the hidden value of intangible assets has yet to be fulfilled.72

Intangible Asset Monetization – Athena Alliance3

What are Intangible Assets and Why are They Important?
To understand the significant impact of intangible assets, we must know a little more
about them: what constitutes an intangible asset, what are the different types of assets,
and how are intangible assets considered in corporate financial statements.8

What are Intangible Assets?
There are numerous ways to define, categorize, and classify assets, including intangible
assets. According to Daum, assets are everything owned economically by a company thathas monetary value. Assets come in the following four forms:• Current assets, such as assets likely to be sold or consumed within one year
• Fixed assets, like plant equipment and properties that have a useful life of morethan one year
• Investments, such as a company’s stock and bond holdings• Intangible assets, which includes everything that is not physical or investment but
is of value to the company … also called “intellectual capital.”9
Lev notes that “[a]n intangible asset is a claim to future benefits that does not havephysical or financial (a stock or a bond) embodiment.”10 He adds that intangible assets
are “sources of value generated by innovation, unique organizational designs, or humanresources practices. Intangibles often interact with tangible and financial assets to create
corporate value and economic growth.”11
As Daum goes on to describe:Intellectual capital comprises human capital, structural capital, partnership capitaland customer capital. … In addition a company’s culture and strategic capabilities
count as intellectual capital or intangible assets.12
Others have differing categories. For example, Contractor divides corporate knowledge
into the following subsets:• Intellectual property: patents, brands, copyrights (registered)• Intellectual assets: drawings, blueprints, written trade secrets, databases,
formulae, recipes (unregistered but codified)• Intellectual capital: collective corporate knowledge, individual employee skills• Knowledge, “know-how,” organizational culture, customer satisfaction(uncodified human and organizational capital).13
A slightly different version of this comes from Zambon, et al.14 Like the other studies
cited here, this framework defines intangible assets as “non-physical sources of expected
benefits,” with the following three subcategories:• Intellectual Property—Intangible assets with legal or contractual rights, including
patents, trademarks, designs, licenses, copyrights, film rights, and mastheads.
• Separately Identifiable Intangible Assets—Information systems, networks,
administrative structures and processes, market and technical knowledge, humanIntangible Asset Monetization – Athena Alliance•4

capital (if embodied in a codified form), brands, intangibles embodied in capital
equipment, trade secrets, internally generated software, and drawings.
Goodwill (Non-separable Intangible Assets)—Prior intangible investments
embodied in organizations, management expertise, geographical position, ormonopoly market niche.

Because there are so many different kinds of intangibles assets perhaps the best way to
fully recognize all of them is to make an extensive list (Appendix A).15 The Financial
Accounting Standards Board (FASB) classifies 29 intangibles into five categories:
marketing-related, customer-related, artistic-related, contract-based, and technologybased.16 This list details assets such as package design, customer lists, and trade secrets.
Additionally, the American Institute of Certified Public Accountants (AICPA) lists atleast 90 different intangibles, ranging from chemical formulas to retail shelf space.17

Why are Intangibles Important?
Since the industrial revolution—an era dominated by the supremacy of manufacturing
economies—wealth has been measured in terms of control of scarce resources,
productivity, and market domination or market share. However, American industry has
evolved into an environment defined by technology, innovation, creativity, and service.
The metrics of the 21st century economy must now accurately represent the wealthcreation arising from knowledge-based activities across all sectors.
Manufacturing has long been supported by economies of scale, but size advantages do
not necessarily drive success in innovation-based economies. Large centralizedorganizations can end up limiting productive operations and growth in the global
economy. Today’s rapid advances in science and technology can incubate and flourish incoordinated or integrated—and relatively smaller and more flexible—enterprises.
Flexible operations spring up where resources such as talented labor pools exist or where
valuable technological partners reside. The intangibles of know-how or innovation-based
relationships thus drive operational decisions under this new paradigm of competitive
advantages in the market. Consequently, popular phrases, such as “information
revolution” or “knowledge-based economy,” have sprung up to describe these modern
economies.
These changes have transformed industries from centralized behemoths to widelydispersed operations that tend to operate well below the gaze of Wall Street. Overall
economic growth and market value creation is being driven by the little enterprises thatcan more easily adapt to rapid changes in this new economy. The new economy is andwill continue to be intangible-focused to harness the advantages of technologicalproductivity, high-skilled labor, and cutting-edge creativity. In this new economy,
knowledge-based and intangible resources represent the true source of sustainedcompetitive advantage.18

Intangible Asset Monetization – Athena Alliance5

According to Daum:
Knowledge as a new factor of production will help a society or [a] nation as wellas its organizations to handle new challenges and ever-changing conditions and tomaster innovation, which is the success factor in the new economy—not only forcompanies but also for nations.19
But the standard notion of “knowledge” is not sufficient to explain the shift. As Daumgoes on to remark:Economic power will not simply flow to those nations who educate their people,
who are the most wired, or who invest most of their GDP [gross domestic
product] in R&D [research and development]. It will flow to those who, in
addition, are the most creative in bringing together business, government, capital,
information, consumers, and talent in networked coalitions that create value.20

Do Intangibles Matter to Corporate Strategy?
Most companies are composed of significant amounts of intangible assets in their net
worth. But does senior management recognize them and effectively and consequently
include them in performance measures and corporate strategy? Yes and no.
In a 2003 Accenture survey of senior managers across industries, 49 percent ofrespondents said that intangible assets are their primary focus for delivering long-term
shareholder value.21 Yet only 5 percent stated that they had an organized system to track
the performance of these assets. A full one-third of the respondents said they had nosystem to measure performance whatsoever. When asked to measure the importance ofmanaging intangible assets for long-term value, half of the respondents listed the issue intheir top-three most important considerations. A noteworthy 50 percent of the survey
respondents seemed to believe that the equity markets recognized and eventually
rewarded companies that invest in intangibles.
Numerous models have shown the connection between intangible assets and ultimate
financial outcomes. These models allow managers to understand the key value drivers of
their specific industry and how those value drivers can be enhanced. Such models include
The Balanced Scorecard,22 the Danish Intellectual Capital Statement,23 the Skandia
Intellectual Capital Navigator,24 Intellectual Assets Monitor,25 thePriceWaterhouseCoopers (PwC) ValueReporting,26 the KPMG Value Explorer,27 and,from the now defunct accounting firm of Arthur Andersen, Value Dynamics.28
For example, research by Low and Kalafut found a strong correlation between the
management of intangible assets and the overall success of a firm.29 Using a complicatedmodel they call the Value Creation Index (VCI), Low and Kalafut were able to measure
the performance of companies based on such factors as the utilization rate of patents andR&D expenditures compared to overall revenues. They also incorporated polls taken byindependent researchers that track intangible elements, such as company reputation andemployee morale. Overall, the index measured the following intangibles: leadership,
strategy execution, communication and transparency, brand equity, reputation, networks

Intangible Asset Monetization – Athena Alliance6

and alliances, technology and processes, human capital, workplace organization andculture, innovation, intellectual capital, and adaptability.
The VCI scores ranked companies that seemed to do the best job of managing and using
their intangible assets. The model successfully correlated high VCI scores with strong
financial performance.30 This research supports the notion that intangible assets are vitalto financial performance in an organization and must be accounted for in strategic
decision-making and investment.

Financing Intangibles and Innovation
It has been said that money is the lifeblood of business. More to the point, the ability toraise capital for a new idea or a new enterprise is at the heart of our economic system.
Innovation requires a financing system and the U.S. financial system and capital markets
are the model of the world. Even with challenges from other financial centers, the U.S.
capital markets remain the gold standard. Partly as a result, our innovation systemflourishes.
But having great capital markets does not necessarily translate into a strong appetite forinnovation. New products and ventures are risky for investors. Proven performers are thebelles of the ball who garner all the attention of financiers while upstarts are left
scrambling to impress a small pool of skeptical suitors.
Financial concerns also can cause companies to retrench to proven revenue winners at atime when long-term financial growth may markedly depend on investments in thepotential winners of the future. Numerous reports have indicated that U.S. investment in
R&D activities—essential for discovering new innovations—has slowed.31 Likewise, therecent subprime mortgage meltdown shows what happens when the financing system
breaks down and risk aversion across markets takes hold. When credit becomes scarce,business investment, including in innovative activity, slows down.
Keeping our innovation system going may very well require the development of newsources of funding. Currently, companies can raise money based on their physical andfinancial assets. Physical and financial assets can be easily bought and sold, borrowed
against, and used to back other financial instruments. As such, these assets provide
companies with a source of the investment funding needed for the U.S. economy to growand prosper.
But, as this paper will demonstrate, utilizing intangible assets for investment financing ismuch more difficult. The more than $9 trillion in intangible assets mentioned earlier arelargely hidden away, unavailable for financing purposes. As such, there is a huge
opportunity cost imposed on the U.S. economy when such a large source of potential
financing is locked up. Since intangibles assets are not generally available to serve as asource of investment and risk capital, innovative companies may face a higher cost ofcapital—or even a dearth of capital—to fund new ideas. Unable to use their intangible
assets as a financial tool, perspective borrowers face a system that does not understandIntangible Asset Monetization – Athena Alliance7

their true revenue potential and is unable to judge operational risks appropriately.
Existing ideas, in the form of patents and other intellectual property, sit unused. New
ideas never gain traction or remain unexplored or undeveloped. Economic potential goesuntapped—and therefore wasted.
The illiquidity of those assets raises the cost of capital for all borrowers, not just thoseseeking to fund innovation. Unlocking the financial potential of intangible assets will
provide a new mechanism for fueling future economic growth. Increased asset utilizationin financial markets will allow for greater investment opportunities.
The U.S. financial system has always been adaptive to change. Lamoreaux and Sokoloff
point out that “perhaps the most striking aspect of the record of innovation over
American economic history is the flexibility that technologically creative entrepreneurs
have exhibited in adjusting their business and career plans so as to obtain financing for,and extract the returns from, their projects.”32
The monetization of intangible assets is just one more step in the evolution of financing
innovative activities. Just as physical assets were used to finance the creation of more
physical assets during the industrial age, intangible assets should be used to finance thecreation of more intangible assets in the information age.

Intangible Asset Monetization – Athena Alliance

8Legal and Regulatory Frameworks Governing Intangible Assets
To foster trust in the financial sector and guarantee the accurate functioning of the capital
markets, government laws must promote clear asset recognition, corporate transparency,
and the protection of security rights. Intangible assets, like any other asset class, aresubject to banking and securities laws and regulations. Likewise, commercial transactions
involving intangible assets are subject to normal commercial contract and tort law.
There are, however, a number of intangible-specific rules. From accounting standards totax codes, many market rules have been revised and amended in recent years to maximize
the use and development of intangible assets. For example, the commercial code has
expanded the asset categories used as loan collateral to foster access to capital forinvestment in intangible assets. Accounting standards have undergone a series ofrevisions in an attempt to achieve transparency and to reflect the real value of intangible
assets. The following section presents the most relevant U.S. laws and regulations
governing the use and consideration of intangible assets.

Financial Accounting Standards
Private investors and other consumers of financial products rely heavily on transparent,
accurate, and credible financial information that can be compared across industries tofacilitate participation in the capital markets. It is therefore not surprising that accounting
standards are central to the issue of monetization of intangible assets. Government
regulators, academics, and professional leaders have identified an accountability
deficiency in current accounting practices that leads to a potential misuse of reporting
methods and distorts the equilibrium and credibility of capital markets.
U.S. Accounting Standards
The mission of the Financial Accounting Standards Board (FASB)—an independent
organization funded entirely by the private sector—is to set accounting and reporting
standards to protect the consumers of financial information, namely investors andcreditors.33 FASB issues U.S. accounting standards, which are known as Generally
Accepted Accounting Principles (GAAP). In July 2001, FASB issued Statements ofFinancial Accounting Standards (SFAS) 141 and 142, which addressed businesscombinations and intangible asset accounting issues.34 These measures primarily changed
the accounting process for “goodwill,” a standard catch-all category for intangibles on
financial statements.
SFAS 141 eliminated “pooling-of-interests” accounting whereupon an organization
simply merged the financial statements of an acquired firm with its own without aseparate accounting of the intangible components of the transferred goodwill.
Organizations must now separate out certain intangibles and account for goodwill
through purchase accounting, which incorporates into the financial statements the actual
purchase price paid by the acquirer. Consequently, some intangible assets missed in theIntangible Asset Monetization – Athena Alliance9

past are being captured by the implicit market value of the entire enterprise covering all
assets—tangible and intangible.
SFAS 142 dictates accounting for the true value of intangibles in an organization.
Organizations must annually attempt to calculate the current market value of theirintangibles and integrate any value impairment or enhancement into the balance sheet.
This significant regulation demands that a firm have comprehensive understanding of its
own intangible assets and encourages internal corporate systems for accurately tracking
and valuing them.
However, SFAS 141 and 142 only apply to assets acquired during a businesscombination; assets developed in house are specifically not covered. This severely limits
the inclusion of intangibles assets on the balance sheets since Regulation G restricts theuse of non-GAAP financial measures for accounting purposes.35 (For more on accounting
standards, see our companion working paper, Reporting Intangibles.)36
This quirk of the accounting standards has a special implication for intangible assets that
may be split out from the company during a securitization process (to be discussed later).
While the cost of an internally generated intangible is not recognized—and therefore
expensed, not capitalized—once that asset is transferred it is subject to SFAS 141. As
Anderoli and Dembitz explain:
The licensed intangible will automatically be a long-lived intangible rather than
goodwill. SFAS 141 provides that intangible assets will be recognized (andvalued) separately from goodwill only if they (1) stem from contractual or legal
rights, or (2) can be sold or transferred. Since the intangible asset is licensed to anaffiliate, it automatically has a value separate from goodwill. If the asset has afinite useful life, it must be amortized for financial reporting purposes.37
SEC Disclosure Requirements
Two areas of securities laws and regulations also impact the disclosure of intangible
assets. The first is the Securities and Exchange Commission’s (SEC) regulations on
disclosure of nonfinancial information. As part of these rules, companies are required todisclose information that is considered “material” to the financial situation of thecompany in the management discussion and analysis (MD&A) section of the financial
statements.38 In the past, such disclosures were generally vague and consideredboilerplate.39 Under current rules, the SEC has set down guidance that:[W]hen preparing the MD&A, companies should consider whether
disclosure of all key variables and other factors that management uses tomanage the business would be material to investors and therefore required.
These key variables and other factors may be nonfinancial, and companies
should consider whether that nonfinancial information should be
disclosed.40

Intangible Asset Monetization – Athena Alliance10

For the most part, the specific types of information that the SEC suggests be disclosed are
more along the lines of performance measures than intangible assets. However,intangibles do fit under the SEC guidance.
The second major area of disclosure is dictated by the Sarbanes–Oxley Act of 2002 (P.L.
107–204). Sarbanes–Oxley requires corporate management to disclose all factors relevantto the financial condition of the enterprise in the financial statements and company risk
strategy portions of their disclosures.41
According to Banham, the major sections of the Sarbanes–Oxley Act, which requirecertification of financial statements and of internal financial reporting procedures, will
force companies to better identify and manage intangible assets.42 However, these
sections apply to all assets, not just intangible assets. These requirements may help
companies focus on intangibles, but only recently has compliance with Sarbanes–Oxley
begun to influence how companies track intangibles.43 For example, the Intellectual
Property Management group of the risk consulting company Kroll now conducts audits ofintangible assets to ensure compliance with the Sarbanes–Oxley requirements foradequate controls, policies, and procedures.44
International Accounting Standards (IAS)Intangible assets are also covered under IASB’s regulations. In 1998, IASB issued
International Accounting Statement (IAS) 38,45 which in part continued research cost
guidelines that had been evolving since 1978 (originally called IAS 9). But IAS 38 went
well beyond the issues covered in IAS 9. The objective of IAS 38 is to stipulate theaccounting treatment for intangible assets not dealt with specifically by another standard.
Under IAS 38 an asset is a resource controlled by the enterprise as a result of past events(i.e., it was created in house or acquired) and from which future economic benefit (cashflow or other financial assets) are expected. Thus, the three critical attributes of an
intangible asset are as follows: identifiably (it can be disaggregated and sold separately);
control (there is power to obtain benefits from the asset); and future benefits (there issubstantial evidence of the intangible’s value). If an intangible item does not meet both
the definition of and the criteria for recognition as an intangible asset, IAS 38 requires theexpenditure on this item to be recognized as an expense.
Some examples of possible intangible assets include computer software, patents,
copyrights, motion picture films, customer lists, etc. These assets can be acquired throughseparate purchases, as part of a business combination, or through a government grant, anasset exchange, or an internal generation (self-creation). However, certain intangibles—
brands, mastheads, publishing titles, and customer lists—are explicitly prohibited frombeing recognized as an asset if they were internally generated. Internally generated assetsthat come from research activities cannot be recognized. Likewise, limits are placed on
assets internally generated from (nonresearch) development activities.

Intangible Asset Monetization – Athena Alliance11

Taxing Intangibles
In addition to financial accounting standards, tax law and regulation play a major role indetermining how companies treat intangibles. The tax code comes into play in two ways:
how expenditures on the creation and maintenance of intangibles are treated (specificallywhether and how much of those expenditures are deductible); and how the tax code treats
income from intangibles.
On the expenditure side
The differences between financial (book) accounting and tax accounting are numerous
and well known.46 The same distinctions apply to the treatment of intangibles.47 For tax
purposes, even the definition of intangibles as classes of business expenses is slightly
different from financial accounting rules. According to the Internal Revenue Service(IRS):
Intangible Property is property that has value but cannot be seen or touched. It
includes items such as:
1. Goodwill.
2. Going concern value.
3. Workforce in place.
4. Business books and records, operating systems, or any other information base,including lists or other information concerning current or prospective
customers.
5. A patent, copyright, formula, process, design, pattern, know-how, format, or
similar item.
6. A customer-based intangible.
7. A supplier-based intangible.
8. Any item similar to items 3–7.
9. A license, permit, or other right granted by a governmental unit or agency(including issuances and renewals).
10. A covenant not to compete entered into in connection with the acquisition of
an interest in a trade or business.
11. Any franchise, trademark, or trade name.
12. A contract for the use of, or a term interest in, any item in this list.48
Importantly, a financial interest in a patent is not considered an intangible, nor is mostcomputer software.49 Therefore, any financial instrument using an intangible as security
is not capitalized while the underlying asset is capitalized (similar to the way financial
instruments are secured by physical assets).
Which intangible assets may be capitalized and which are deductible is the subject ofnumerous IRS regulations. For example, in December 2003, the IRS issued updated
regulations on the capitalization of intangible assets.50 These regulations were designed toclear up uncertainty caused by the 1992 U.S. Supreme Court decision in INDOPCO, Inc.
v. Commissioner (503 U.S. 79), which held that payments that created a “significant
future benefit” must be capitalized rather than expensed. The heart of the case wasIntangible Asset Monetization – Athena Alliance12

whether transaction costs, such as investment banking fees, can be capitalized, but theruling created confusion about how to treat numerous other transaction costs.
The new regulations require that most costs to acquire or enhance an intangible asset becapitalized.51 As Feinschreiber and Kent explain, “this transaction cost rule recognizes
that the taxpayer is obligated to capitalize the following amounts: the cost of the asset
itself, and the ancillary expenditures for the acquiring, creating, or enhancing theintangible asset.”52
The ability to depreciate purchased intangible assets can result in major tax savings insome acquisitions, such as Johnson & Johnson’s purchase of Pfizer’s consumer healthcare division and the brands of Benadryl, Neosporin, and Visine.53
However, other regulations apply to other types of intangible assets, such as research anddevelopment costs, which are fully deductible. As the Congressional Budget Officenoted, companies have options when dealing with the deductibility of research expenses:
The IRS allows firms to deduct R&D expenditures in the year in which they are
made; amortize them over at least 60 months, once the work begins to benefit thefirm; or write them off over a 10-year period.54
Looking at it this way, the cost of obtaining or defending a patent is capitalized while thecost of the research that leads to the patent is deductible.
As a recent Treasury Department report pointed out, expensing intangibles anddepreciating physical assets results in the following situation:
Income from investment in intangible assets (e.g., R&D and advertising)
generally receives more favorable tax treatment than does income frominvestment in tangible assets (e.g., plant and machinery). Investment inintangibles might be excessively encouraged by the tax system, relative toinvestment in tangible assets.55
However, there is no evidence that the U.S. is systematically over-investing in intangibles
and under-investing in tangible assets. Thus, it is unclear to what extent the difference inthe tax treatment between expensing and depreciation influences the investment inintangibles versus tangibles.
Beyond the issue of expensing and depreciation, other tax incentives apply to the creationof certain intangibles. A well-known example is the research and experimentation tax
credit (commonly recognized as the R&D tax credit). The standard credit is 20 percent ofqualified research expenditures above a certain base. But there are variations and options,
including an alternative incremental tax credit, an alternative simplified credit, a basic
research credit for sponsored university research, and an energy research credit.56

Intangible Asset Monetization – Athena Alliance

13

Likewise, there are numerous incentives for investing in human capital. A recent
Treasury Department report said:
These include the tax exclusion of scholarships, fellowships, and the value of
reduced tuition; education tax credits; deduction of student loan interest; tax
advantaged education saving accounts; deductibility and exclusion of employerprovided education expenses; deductibility of tuition; and allowing students
beyond the normal age cut-off to qualify as eligible children when computing
their parents’ earned income tax credit and their parents’ dependent deduction.57
Most of these incentives, however, deal with individuals seeking more education and notwith incentives to organizations to improve the skills and knowledge of their workforce(human capital). The overall benefit of the deductibility of employer-provided
educational expenses and the business deduction for work-related education is limited.58
On the income side
The tax treatment of deductions is important. But how income from intangibles is taxed ismuch more important for public policy purposes. At issue is the determination of where
the ownership of those assets resides and is therefore taxed. Fisher puts it this way:
Intellectual property rights are often created in relatively high-tax jurisdictions.
As a result, tax departments in multinationals (and their advisers) frequently lookat ways of structuring operations in an attempt to reduce the overall tax burden,
usually involving a number of territories and the transfer of, or the creation of aninterest in, intellectual property.59
Various jurisdictions are offering low tax rates on income from intangibles, specificallyon royalties from intellectual property. For example, Ireland has long been seen as thelocation of choice for intellectual property because of its exemption of patent income
from corporate taxation.60 More recently, the Netherlands has entered the race to becomea tax haven for intangibles.61 The website LowTax.Net describes the situation this way:
“The Netherlands is an extremely attractive jurisdiction in which to locate a royalty
conduit company.”62
The Irish would surely dispute that they are an IP tax shelter; they see their policy as a tax
incentive to locate R&D in Ireland. As the law firm of A&L Goodbody pointed out in its
briefing paper The Irish Patent Exemption:
The basic requirements for the patent exemption have always been that the work
which went into developing and having a patent registered must have been carriedout in Ireland, other than work which is ancillary to the main work carried out in
Ireland.63
Ironically, this requirement was repealed in April 2007 after the European Commission
complained that it hampered the rights of establishment and free movement of services.64
As of January 2008, the requirement was broadened to require work be done in any
European Union (EU) nation and the exemption be capped at €5 million in aggregate.

Intangible Asset Monetization – Athena Alliance14

In any event, as Simpson points out, there are ways to game the system:
A common device is to take successful, patented American ideas and thendevelop new generations of them—with help from an offshore research division.
The ownership of the new version (and profits on licensing it) can then legally beshared between the U.S. parent company and the offshore unit.65
The question is how those profits (and royalties) are shared and what price the parent
company receives when it transfers the intellectual property to its offshore subsidiary.
The U.S. tax code requires that—prices charged by one affiliate to another, in an intercompany transaction
involving the transfer of goods, services, or intangibles, yield results that areconsistent with the results that would have been realized if uncontrolled taxpayers
had engaged in the same transaction under the same circumstances.66
The efficacy of the requirement for arms-length pricing is the subject of debate,especially given the complexity of these cost-sharing arrangements. Cole argues that “thecode now requires that a U.S. taxpayer take into account the full value of U.S. intangible
property transferred overseas, whether in exchange for stock or cash, taking into accountthe income derived from the transferred intangible after the transfer.”67 However,
Sullivan said that “determining fair terms for interaffiliate transactions involving
intangible assets involves a great deal of subjective judgment, so those determinations area constant source of conflict between drug companies and the IRS.”68
The IRS adopted new regulations on this issue effective January 1, 2007,69 but concerns
remain. In statements to both the Senate Finance Committee and the Senate Permanent
Subcommittee on Investigations in 2006, then IRS Commissioner Mark Everson called
this “a high-risk compliance concern”:
Taxpayers, especially in the high technology and pharmaceutical industries, areshifting profits offshore through a variety of arrangements that result in thetransfer of valuable intangibles to related foreign entities for inadequate
consideration.70
On April 5, 2007, an IRS-issued “Industry Director Directive” stated the following:
Cost Sharing has been identified as a Tier I issue and is one of the mostsignificant compliance challenges facing LMSB [the Large to Mid-Size Business
Division of the IRS]. Cost Sharing Arrangements (CSAs) are often used bytaxpayers inappropriately to transfer intangible assets and associated profits
offshore to related foreign affiliates for inadequate consideration. LMSB
Compliance estimates that inadequate consideration has resulted in material
underreporting of taxable income by U.S. Corporations.71
On the other hand, Hardgrove and Voloshko argue that the concern is overblown and that“properly done it [a global IP strategy] can save tax without abusive or underhanded
methods.”72

Intangible Asset Monetization – Athena Alliance

15

Within the U.S., there is a similar concern. Many states exempt intangible property fromstate and local property taxes. Most of these exemptions are for financial intangibles(stocks, bonds, and other securities) rather than intellectual property (patents andcopyrights). But intellectual property is often covered as well. For example, Montana
defines intangible property as that which “has no intrinsic value but is the representative
or evidence of value, including, but not limited to, certificates of stock, bonds,
promissory notes, licenses, copyrights, patents, trademarks, contracts, software, andfranchises.”73 In Kentucky, intangible property is exempt, but “research libraries” areconsidered tangible property subject to fair-market-value tax.74
Nevada and Delaware are seen as tax-haven states for intangible income. Nevada has nocorporate income tax and Delaware does not tax income on intangibles. Taxes are
reduced by setting up an “intangibles holding company”—also known as a Delaware
Holding Company or a Passive Investment Company—which owns the intangible assets.
The income from the intangible assets is considered received in Delaware or Nevada andis therefore not taxed.75
This strategy is often used by retail companies and franchises. As Stansky explains:First, a national retailer creates an intangible holding company in a state that does
not tax royalty income, such as Delaware. The retailer then assigns its trademarks
to the holding company, which it owns. The holding company licenses thetrademarks to the retailer, which, in turn, pays the holding company for the use of
the marks.
In states where it may do so, the retailer taxes a deduction on its corporate income
tax returns for the royalty or licensing fees paid to the holding company. Thatleads to less taxable income in those states.76
But as the Bureau of National Affairs reported, “States have increasingly resisted a
corporate tax planning strategy involving the deduction of royalty payments forintangible property rights held by an out-of-state subsidiary.”77 The key feature is the“substance” presence rule. As one holding company management firm warned, “anintangible holding company must be prepared to satisfy [to] other states as to its
substance in Nevada or Delaware.”78
This is the same issue that arose concerning the application of state sales tax to Internet
sales. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the U.S. Supreme Court ruledthat states could not tax an out-of-state catalog company that lacked a physical presencein the state. However, state courts have recently held that Quill does not shield intangible
holding companies from corporate income taxes on their in-state earnings, arguing thatthe physical presence argument works both ways. Since these companies have nobusiness substance or business purpose in their supposed home state of Delaware or
Nevada, they are therefore subject to taxation where the income was earned.79 Recent
cases in Oklahoma,80 New Jersey,81 and West Virginia82 have upheld this argument andfound intangible holding companies liable for state taxes. In addition, a number of states
have laws on their books that effectively nullify this tax strategy.83

Intangible Asset Monetization – Athena Alliance

16

The federal government also has afforded certain intellectual property royalties special
treatment, admittedly in a very minor fashion. Last year, Congress changed the tax code
to allow sales of song collections to be taxed at the capital gains rate rather than as
ordinary income (see Sec. 204 of P. L. 109–222) and to allow songwriters to amortize
their expenses over five years (see Sec. 207 of P.L. 109–222). Both of these changes
were relatively noncontroversial because royalties on songs are paid differently than onother copyrighted materials. Songwriters are paid royalties every time the song plays andmust pay taxes immediately; writers can spread out their royalty payment and taxes overa number of years.84 There seems to be little interest in expanding this form of tax relief
to income from other intangibles.
Interestingly, the combination of expensing and income give rise to an opportunity for tax
arbitrage. The new Irish law on the patent income exemption has lead to fears in thatnation that companies will move their R&D out of Ireland to high-tax-rate countries.85
Companies could expense their R&D costs in a high-tax country to lower their taxable
profit, while claim the income from the royalties in a low-tax country.

Intangible Asset Monetization – Athena Alliance

17Intellectual Property Rights
As stated previously, one type of intangible asset is classified as intellectual property.
These assets include patents, copyrights, and trademarks, and are specifically protected as
exclusive property by law. Article I, Section 8 of the U.S. Constitution grants Congress
the power to—promote the progress of science and useful arts, by securing for limited times toauthors and inventors the exclusive right to their respective writings anddiscoveries.86
Sometimes trade secrets are included as intellectual property since they can also beprotected by law. In addition, contract law can shield other types of intangibles, such as
noncompete covenants. But these assets are not considered IP.
Patents and copyrights long predated the Constitution. Patents—the state grant of amonopoly—were known in the ancient and medieval world. The word patent comes fromthe Latin litterae patentes, meaning an open letter. Such letters were used by medieval
monarchs to confer rights and privileges.87 But these were royal favors and not meant fora specific invention; that happened much later. The antecedent of U.S. patent andcopyright law is the British Statute of Monopolies of 1624 (patents) and the English
Statute of 1710 (copyrights).88
Patents
Patents are issued by the U.S. Patent and Trademark Office (U.S. PTO). A patent is agovernment grant of a monopoly right to an invention. A patent is described in law as“the right to exclude others from making, using, offering for sale, or selling” theinvention in the United States or importing the invention into this country. It is important
to note that a patent does not confer the right to manage the invention, but the right toexclude others from managing it.89 As such, a patent right must be enforced through thecourts by suing the alleged infringer. Remedies in a patent infringement case include
injunctions against the infringing product, damages, and royalties.90
In exchange for this grant, the patent applicant must disclose all relevant information to
the public in the form of the application. As such, patents fulfill the Constitutional
mandate of promoting “the progress of science and useful arts” in two ways. First, by
granting a limited monopoly, they create a financial incentive for the development andcommercialization of the invention. Second, by requiring disclosure, they spreadknowledge that might have otherwise been locked up as a trade secret. While patents are
not granted for inventions that are the same as a previously patented invention, many
patents build on the knowledge disclosed in previous patents.
Patents are generally only enforceable within a nation’s boundaries or at the border (inthe case of imports). There is, however, an anti-circumvention clause in the patent law
that deals with supplying components in the United States for assembly abroad.91 In
addition, the lack of sufficient intellectual property rights is considered an actionableIntangible Asset Monetization – Athena Alliance18

trade subsidy under international trade law. Countries may impose trade sanctions, suchas higher tariffs, on the goods and services coming from another nation found to have lax
intellectual property rights.92 Ironically, intellectual property rights (IPR) have recently
figured in a trade dispute in the reverse fashion: a nation was granted the right to override
IPR protections as a sanction against the U.S. for compensation for a trade violation(although the case involved copyrights not patents).93
Two international treaties govern cooperation among nations specifically on patent law:
the Patent Cooperation Treaty and the Paris Convention for the Protection of Industrial
Property, known as the Paris Convention.94 The Paris Convention covers a variety of“industrial property,” including patents, industrial designs, trademarks, and trade names.
The Patent Cooperation Treaty is more process-oriented, dealing with “cooperation in thefiling, searching, and examination of applications for the protection of inventions, and for
rendering special technical services.”95
It should be made clear that the subject of patents is currently in flux. Concerns havebeen raised that excessive patenting and poor patent quality are harming the innovation
process.96 Issues include the expansion of patents to business processes, the severity of
the remedies, the process of enforcement (“patent trolls”), the question of whether aninvention is “novel,” and other concerns. Patent law has been a regular subject of recent
Supreme Court cases and patent reform legislation is pending in Congress. As of thisdate, the current patent system is in danger of creating more confusion over theenforceability of patents,97 which could create additional risk for the monetization of
intangibles.
Copyright
Like a patent, a copyright is a legal grant of a monopoly. A copyright conveys the sole
right to publish or to perform an original work. A copyright also prohibits derivative
works without the permission of the copyright holder. Copyright covers “(1) literaryworks; (2) musical works, including any accompanying words; (3) dramatic works,
including any accompanying music; (4) pantomimes and choreographic works; (5)pictorial, graphic, and sculptural works; (6) motion pictures and other audiovisual works;(7) sound recordings; and (8) architectural works.”98
Unlike patents, the copyright is not granted by a government agency after a review
process. A copyright comes into existence with the creation of the work “in fixed
form.”99 A copyright may be registered with the U.S. Copyright Office in the Library ofCongress and a notice of copyright (usually the symbol ©) placed on a copyrighted work.
However, neither of these actions is required. The copyright exists automatically.
Recently, alternative forms of copyright have emerged. Two of the most widespread are
the Creative Commons and the free and open source software licenses. Creative
Commons was established to cope with growing problems resulting from the automatic
granting of copyright. Prior to the Copyright Act of 1976, copyrighted works had to beregistered and a notice of copyright was required. Since the elimination of thisIntangible Asset Monetization – Athena Alliance19

registration requirement, it has sometimes become problematic to find and secure
permission to use a copyrighted work. While the copyright law allows for “fair use”
without the copyright holder’s permission, the definition of what is covered under thatexception is somewhat unclear.100
Under the Creative Commons, an author can register differing levels of rights. The
system “defines the spectrum of possibilities between full copyright—all rights
reserved—and the public domain—no rights reserved” (emphasis in original).101 An
author can specify what level of rights they retain; they can waive all rights to the workor waive only some rights in specific cases. For example, an author may allow unlimited
reproduction/republication of a work for noncommercial purposes while prohibiting thecreation of derivative commercial works without permission.
Free and open source software licenses cover a number of types of licenses that generally
allow the sharing of software without permission or the payment of royalties.102 Often
known as a “copyleft,” the purpose of these licenses is to require that the software
continue to be freely shared. Developers of the GNU operating system—pioneers of open
source software—explain it this way:
The simplest way to make a program free is to put it in the public domain,
uncopyrighted. This allows people to share the program and their improvements,
if they are so minded. But it also allows uncooperative people to convert the
program into proprietary software.
[C]opyleft says that anyone who redistributes the software, with or withoutchanges, must pass along the freedom to further copy and change it.103
Copyrights have long lives, well beyond those of patents. Current law states thatcopyrights remain for the life of the author plus 70 years. After the copyright expires, thework becomes part of the public domain.
As with patents, enforcement of copyrights is generally through the courts. Remedies
include seizure of the infringing goods, damages, and criminal charges. Unlike patents,
however, there are some compulsory licenses required by the Copyright Act, including
royalty fees from cable operators and satellite carriers for certain retransmission and fromimporters or manufacturers for distributing digital audio recording products. The U.S.
Copyright Office manages these fees.
Copyrights, again like patents, are a matter of national law. However, international
treaties, especially the Berne Union for the Protection of Literary and Artistic Property(Berne Convention) and the Universal Copyright Convention (UCC), govern theprotection of foreign copyright holders.104
Trademarks (the Lanham Act)The Lanham Act (Title 15, Chapter 22 of the U.S. Code) covers trademarks and service
marks. According to the U.S. PTO, a trademark is “a word, phrase, symbol, or design, ora combination of words, phrases, symbols, or designs, that identifies and distinguishes theIntangible Asset Monetization – Athena Alliance20source of the goods of one party from those of others.”105 Trademarks apply to goods;
service marks apply to services. The term trademark, however, is usually used to coverboth trademarks and service marks. There are also certification marks, collective
trademarks, and defensive trademarks.106
Unlike patents and copyrights, the rights conferred under a trademark are not absolute.
The standard is not simply unauthorized use but whether such use causes confusion,
deception, or misrepresentation. In addition, a mark must be used to be enforced. Nonuse
can result in the abandonment of the mark and the removal of the mark from U.S. PTO
registration. Likewise, a mark may at some point be deemed generic (and part of the
public domain) if it becomes commonplace, such as the term Aspirin.
Trademarks need not be registered with the U.S. PTO, but such registration helps inenforcement actions. Registration also assists in the search for, and the resolution of, any
conflicting marks. It also prevents the trademarking of common words or phrases that arepart of the public domain.107
International treaties that apply to trademarks include the Paris Convention, the InterAmerican Convention for Trademarks and Commercial Protection (the Pan-American
Convention), and the Buenos Aires Convention for the Protection of Trade Marks andCommercial Names.
Trade Secrets
Trade secrets are another form of intellectual property, although they are sometimes notincluded in the IP category. As Quinn explains, “a trade secret is any valuable businessinformation that is not generally known and is subject to reasonable efforts to preserve
confidentiality.”108 Unlike patents, copyrights, and trademarks, trade secrets are protectedby both federal and state law—the 1996 Economic Espionage Act (EEA) at the federal
level and the Uniform Trade Secrets Act at the state level.
The EEA created a federal trade secrets act to deal primarily with foreign economic
espionage, but it was rewritten to comply with international trade treaties to treat U.S.
citizens and foreign nationals the same.109 Unlike state laws, which are civil with privateright of action, the EEA is a criminal statute and the government must prosecute
violations. While not as common as state trade secret cases, the U.S. Justice Department
has prosecuted 35 trade secret cases since 2000.110
The Uniform Trade Secrets Act, which virtually all states have adopted, prescribes theremedies in cases of misappropriation of trade secrets, which are defined as—
information, including a formula, pattern, compilation, program device, method,technique, or process, that: (i) derives independent economic value, actual or
potential, from no being generally known to, and not being readily ascertainableby proper means by, other persons who can obtain economic value from its
disclosure or use, and (ii) is the subject of efforts that are reasonable under thecircumstances to maintain its secrecy.111

Intangible Asset Monetization – Athena Alliance21

That last part of the definition is important. Unlike patents or copyrights, the effort ofmaintaining secrecy is critical to maintaining the right.
Nor does trade secret law grant protection in all cases. The criterion for relief ismisappropriation not infringement. One law firm explains it this way:
Trade secrets are not afforded the exclusivity provided by patent protection, since
third parties are at liberty to independently develop the subject matter of a trade
secret or to take a product and perform reverse engineering until the trade secret is
discovered.112
On the other hand, a trade secret need not be actively used in the conduct of business. It
just needs to be information of a commercial value. It may be, for example, an alternative
production process that a company chose not to use.113
However, a trade secret is something that ultimately only exists through litigation. Its
existence is only proven through a court finding applying six tests from the Restatement(First) of Torts, as Halligan and Weyand point out.114 Such trade secrets cases are notalways open and shut. As Pooley explains, “despite the widespread adoption of the
Uniform Trade Secrets Act, trade secret principles continue to develop primarily throughthe common law.”115
Federal Technology Transfer
Special mention must be given to the laws covering government-created intellectual
property. Transfer of government-funded technologies is generally covered under anumber of laws and provisions, including the Stevenson–Wydler Technology Innovation
Act of 1980 (P.L. 96–418); the Patent and Trademark Law Amendments Act of 1980,
otherwise known as the Bayh–Dole Act (P.L. 96–517); the Federal Technology Transfer
Act of 1986 (P.L. 99–502); and the Technology Transfer Commercialization Act of 2000
(P.L. 106–404).116 This set of laws governs how the federal government funds researchwith industry (either through a government laboratory or through a grant to a university)and how the rights to that and other federally funded research are controlled. Specific to
the monetization of intangibles, these laws establish the ownership of federally funded
intellectual property and the sale and licensing of that IP by the federal laboratory or
university.
Intellectual Property and International Law
Two important international organizations need to be mentioned with respect to theprotection of intellectual property. The first is the World Trade Organization (WTO).117
As mentioned above, intellectual property rights are included in international trade
agreements, including those administered by WTO. The Trade-Related Aspects ofIntellectual Property Rights (TRIPS) agreement established the framework forinternational enforcement of intellectual property rights through trade law and for dispute
resolution procedures. Under TRIPS, one nation may impose trade sanctions (such as

Intangible Asset Monetization – Athena Alliance22

higher tariffs) on another nation that fails to adequately protect intellectual property. As
of January 2008, 23 TRIPS cases have been filed with the WTO.118 The U.S. law thattriggers a TRIPS dispute is known as “Special 301.” A subsection of the Trade Act of1974, Special 301 allows the U.S. Trade Representative (USTR) to proceed with
enforcement actions against other nations that may be using intellectual property laws toharm American companies in violation of TRIPS. The USTR also compiles an annual
Special 301 report on compliance by other nations.
The World Intellectual Property Organization (WIPO), a specialized agency of the United
Nations created in 1967, has the mission of “promoting the progressive development andharmonization of IP legislation, standards, and procedures among its Member States.”119
As such, WIPO is the primary administrative organization of the Paris and Berne
Conventions, and 22 other IP treaties.
Intellectual Property and Antitrust
The intersection of intellectual property protection and antitrust is a special area ofinterest. Since IP protection is a grant of a monopoly right, it is important to determine
how that right affects and is affected by antitrust policies designed to prevent monopolies.
Two recent reports by the Department of Justice and the Federal Trade Commission havelooked into the issue. The first was a review of patent law.120 The second looked atantitrust enforcement. 121 Licensing is an issue of specific concern.122 Guidelines issued in
1995 state that IP protection is not presumed to create “market power” (i.e., a monopoly
or oligopoly) in the antitrust context and that existing antitrust analysis is applicable andappropriate for cases where IP is involved.
Contract Law and Noncompete Agreements
Noncompete agreements, which have their own particular quirks and nuances, areanother element of contract law that should be mentioned as part of intellectual property.
Noncompete agreements or covenants are essentially an attempt to control the use of
intellectual capital that remains within an individual (as opposed to that intellectual
capital that is codified outside a person in the form of a patent or copyright). Because
they are part of contract law, the enforcement of these agreements varies from state tostate. In California, noncompete agreements are considered illegal under Business andProfessions Code Section 16600. Agreements made in other states are also generally
found to be unenforceable in California. Nevada, Arkansas, Washington, Montana, North
Dakota, Minnesota, Wisconsin, Connecticut, West Virginia, and Oklahoma are also seen
as jurisdictions that do not enforce these agreements.123
In other states, noncompete agreements are generally subject to a reasonableness test. As
Klingshirn puts it:
Courts have traditionally frowned upon restrictions placed by employers on theiremployees’ right to find and make a living. However, courts will enforce
noncompete agreements if—

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•
•
•

23

the employer proves that it has a legitimate business interest to protect by
restricting its employee’s right to compete against it
the restriction on the employee’s right to compete is no greater than thatnecessary to protect the employer’s business interest
the covenant not to compete is supported by consideration, meaning that theemployee received something in exchange for it.124

Research has found that noncompete agreements can be an effective way for a company
to decrease the mobility of its star employees.125 However, such restrictions may have a
detrimental impact on the ability of a geographical area to foster economic development.

Perfection and Bankruptcy Laws
Two sets of commercial laws are especially important to the use of assets as collateral,
either directly in a loan or in an asset-backed securitization: the Uniform Commercial
Code (UCC) and federal bankruptcy laws.
The UCC serves as the basic business law in the United States, covering business andcommercial transactions from sales to borrowing. Since it covers commercial transactions
within a state (not necessarily interstate commerce), the UCC is a state law. The“uniform” part comes from the adoption of a standardized set of laws in each of the state
and the District of Columbia.
Article 9 of the UCC covers secured transactions and the perfection of secured
interests.126 Perfection simply means the priority of creditors to a secured loan. In otherwords, Article 9 of the UCC determines who gets what in cases of default. As the Texas
Secretary of State’s office puts it:
In plain language, the Uniform Commercial Code allows a creditor to notify othercreditors about a debtor’s assets used as collateral for a secured transaction by
filing a public notice (financing statement) with a particular filing office.127
Since these are state laws, filings take place with the designated state office.
For most of us, the only time we are a party to a recorded financing statement is when werecord our home mortgage. But the UCC covers a variety of assets types. In the late
1990s, an effort was undertaken to substantially revise Article 9 to both simplify andexpand its scope. These revisions, which became effective in 2001, broadened thedefinition of intangibles to include, for instance, software and embedded software as apart of other goods and the definition of proceeds to include IP royalties.128
The revisions to Article 9 also helped clarify the filing location as well as the scope of
assets. As Schwarcz explains:
The problem with intangible assets is that it is often unclear where the collateral islocated or where it originated from. Article 9 UCC improved this situation bymaking the location of the debtor—as opposed to the location of the collateral—
determine the jurisdiction whose law governs perfection; and by clarifying whereIntangible Asset Monetization – Athena Alliance24

a debtor is deemed to be located. The former point is more relevant to tangible
assets; but, the latter one is quite significant to intangible asset-based
securitization.129
Yet the revision did not completely solve the problem, especially for patents. In addition
to filing a financing statement (often called a UCC–1 filing) at the appropriate
jurisdiction, a patent, trademark, or copyright holder may also file a security agreement orconditional assignment with the U.S. PTO or the Copyright Office, as appropriate.
This dual filing system creates a less-than-perfect situation. In a report to the U.S. PTO,
Murphy noted that “secured financings involving intellectual property are currently
caught between the statutory schemes governing intellectual property rights, essentially afederal title system, and the UCC Article [9] state encumbrance system.”130
As a result, it is common for lawyers to recommend that security interests be filed withboth the U.S. PTO or the Copyright Office and the UCC–1 jurisdiction.131 While this
remedy gives some level of protection to the creditor, it does not solve the problem. For
one thing, dual registration increases the transaction costs. It also does not eliminate theuncertainty surrounding who else may have a security interest (and who may not have
filed in all correct places). Murphy notes that:
The result of this legal complexity is that creditors making a good faith effort tocomply with statutory perfection requirements risk complying with theinappropriate statutory scheme and losing their interest in the collateral—the veryrisk which secured financing is supposed to eliminate.132
Some proposals that have surfaced to remedy the problem are discussed later.
Federal bankruptcy laws add another dimension, especially concerning the executory
contract portion of any licensing deal. For example, Section 365(n) of the Bankruptcy
Code protects the right of a licensee of IP in the case of the IP owner’s bankruptcy. But
as Borod and Cassidy note:
Section 365(n) protects only the licensee’s rights in the patent or copyright, notancillary contractual obligations of the licensor to provide technological support
or other services. Accordingly, a bankrupt licensor could reject provisions in thelicensing contract that require the licensor to perform functions in support of thelicensed intellectual property.133
Therefore, the licensor could be freed from any obligation to provide technical support orto defend the IP from infringement.
It should be noted that the law with respect to ownership of and security interests inintangibles continues to evolve. For example, the U.S. Bankruptcy Court for the Districtof New Jersey ruled in 2004 that UCC–9 overrides the New Jersey Alcoholic BeverageControl Act and allows a liquor license to be used as collateral.134 On the other side, in
2005, the Bankruptcy Appellate Panel of the Sixth Circuit ruled that a former employee
of a debtor company could be released from his noncompete covenant as part of a

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settlement between the two, even though the intangible assets (including the covenant)had been bought by another company in an earlier settlement.135 Most recently, theUnited States Court of Appeals for the Federal Circuit ruled that patent law tookprecedent over bankruptcy law in a case where one bankruptcy trustee held title to apatent but the bankruptcy settlement gave the right to sue for infringement to a separate
trustee.136 In a 2-to-1 decision, the Court ruled that only the title holder had the right tosue under patent law.

Securities and Banking Regulations
The impact of securities and banking laws and regulations goes beyond the SEC
disclosure requirements mentioned earlier. As we discuss in the next section, intangibles
also constitute a class of assets that can be collateralized and securitized. Any
securitization of intangible assets is subject to the same regulations as any other asset
class. However, exactly how the securities laws and regulations apply to, and affect,
intangibles is sometimes unclear.
Many securitizations are purchased and sold in private placements to institutional
investors like pension funds and insurance companies. Consequently, thesesecuritizations do not require the same disclosure guidelines as mutual funds, forinstance, that trade on open markets. This does not mean, however, that asset-backed
securities are trading unregulated. SEC regulations cover asset-backed securitization.
These rules have expanded the disclosure and information-sharing requirements of
securitizations, especially in response to the Sarbanes–Oxley Act, to assuage investor
concerns while at the same time expanding securitization asset definitions. Their intent is
to “increase market efficiency and transparency and provide more certainty for theoverall ABS [asset-backed securities] market and its investors and other participants.”137
The new rules, including a new Regulation AB, codify past rules and expand thereporting requirements. The requirements have generally been viewed positively,
although there is some concern over the new requirement for an annual servicing
assertion and accountant’s attestation.138 However, it is unclear how these rules apply
specifically to securitization of intangible assets compared with any other form of assetbacked securities. The extent to which intangible asset-backed securities are seen as
especially risky or esoteric could determine whether they are subject to special
provisions.
In addition to the specifics of asset-backed securities, the entire range of securities laws
and regulations may have an effect on the monetization of intangibles. As discussed
earlier, SEC regulations cover the disclosure of financial and nonfinancial information,
which may affect how intangibles are viewed by the financial community. Other rules
may also apply—rules that have an unforeseen impact on intangibles until they areapplied to a specific case.
Banking regulations also may specifically impact the use of intangibles as collateral. For
example, new banking standards on lending risk are coming into force under the Basel II

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Capital Accords.139 These and other banking regulations have an indirect impact on theformation of intangibles.
Likewise, rules and regulations governing federal lending programs, such as those of the
U.S. Small Business Administration (SBA), also indirectly impact intangibles. The 7(a)program provides SBA guaranties for a portion of a loan from a commercial lender.140
CDC/504 loans are provided with partial guarantees through certified development
corporations (CDCs) for projects involving tangible assets, such as renovations, facilities
construction, and equipment purchases.141 The loans are collateralized by the project’s
assets. However, as we will discuss later, these regulations treat intangibles
inconsistently.

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Financial Markets and Intangible Assets
Intangible assets do not contain the same characteristics as tangible assets. They don’t sit
on factory floors, product showrooms, or, for the most part, balance sheets. As we will
discuss in greater detail in the next section, their fluid nature often makes them hard tosegregate and measure, challenging the ability to discern these assets from other assets,tangible and intangible alike. How does a company, for instance, determine the explicit
value of industry experience in its operations? When does the attractiveness of a brandsupersede its functions and features? Furthermore, an organization could be completely
cognizant of its uniquely competitive intangible assets—company culture, for instance—
but be unable to replicate it across regions or to sustain it through market change.
Intangible assets have unique attributes and behaviors that demand different treatment byfinancial markets. One cannot think of intangibles as a single asset class. There are too
many species of intangibles, each with their own characteristics and with specificcharacteristics of their markets. Some assets, such as cash-flow-generating patents andcopyrights, are well suited for existing capital models and value theories. Their values areverifiable by the tangible revenues they have already generated. Consistent returns beget,in the minds of financiers, an expectation of future returns at similar levels. If a patent ona specialized engine part has garnered predictable revenues for the past few years, forinstance, it is reasonable to assume that the patent can deliver similar returns in the near
future.
But even within the generally well-understood areas of copyrights and patents there are
unique market characteristics. For example, in the copyright sectors, there are relatively
well-developed markets in certain areas, such as songs and plays, with a standard systemof rates and royalty payments. In other areas of copyrighted materials (and even in the
supposedly regularized areas), there is more chaos and even an orphan copyrightproblem.142 In some areas, such as with much of existing copyrighted material, therevenue stream is episodic. In other areas, there are regular and predictable long-term
licensing agreements; for example, in patent and trademarks/brands.
Then there are other intangible assets, like knowledge and culture, where it is very
difficult to apply mainstream capital-leveraging techniques. No prevalently acceptedvaluation model exists to accurately recognize these assets. The market has difficulty
effectively defining their value. Lacking market consensus, less universally convincing
relative valuation assessments must be used. Consequently, these intangibles may havesubstantial lower market worth and higher market risk perception.
To understand how intangibles operate in financial markets, it is important to define
intangibles in a format that aligns with the practical applications of their financial use. It
is then possible to look at methods of incorporating these assets into financial market
vehicles and to analyze creative ways to better understand and exploit their true value.

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Classification of Intangible Assets
For clarity purposes, intangible assets can be segregated into these three broad categories:
cash-flow predictable, market value comparable, and enterprise specific. These
categories capture the various potential capabilities, qualities, and uses of this asset class.
While monetization of intangibles will undoubtedly depend on careful analysis of theidiosyncratic features and limitations of each, this classification should help determine
the broad boundaries under which these assets can be defined.
Cash-flow predictable assets encompass all intangible assets that can be valued using a
traditional discounted cash-flow analysis. These assets generate relatively consistentstreams of periodic payments to the owner of the asset and serve as a basis fordetermining expected future revenues, which can then be discounted back to determine apresent value for the asset. This asset category includes intangible assets such as
royalties, contractual agreements, copyrights, patent licenses, and proprietary right leases.
Market value comparable assets are intangible asset classes that do not generate periodic
cash flows but can be relatively comparable to like assets in the market. Some of these
could very well generate cash flows in the future, but in their present state offer nohistorical revenue streams from which to gauge their value by cash-flow models. For
instance, many companies sit on large caches of unused patents that have not yet beencommercialized. Still, these patents tend to have distinct similarities to active patents that
do, thus making a market value comparable asset valuation practical.
These assets can be valued either by comparable valuation (determining value bycomparing similar assets, much like a real estate appraiser determines house values) or bycost-to-attain methods (simply adding up all the costs required to create or own the asset).
These assets could be transferred from one enterprise to another without losing relativevalue and, due to their transferability, could serve as potential assets for collateralized
securitizations and loans. This asset category includes intangible assets such as brands,
unutilized patents, information systems, customer networks, formulas, trade secrets, andproprietary rights.
Enterprise specific assets encompass all other intangible asset classes. These assets do
not directly generate streams of revenue nor are they easily transferred in their current
states. In effect, they are only valuable to the enterprise that contains them; outside of theenterprise, they are virtually valueless. These assets do not generally support independent
collateralized financing and are by and large only useful for whole-enterprisesecuritizations.
Valuation of these assets can also be very problematic using prevalently recognized asset
valuation techniques. Nonetheless, these assets often account for the preponderance ofmany firms’ overall value. Their value is often recognized wholly in firm valuations andrarely differentiated and segregated out by their specific contribution to the market valueof the firm.

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These assets pose a significant challenge to the creative financier looking to leverageintangible asset value in the capital markets, but could offer extraordinary financial
benefits for those able to do so. Often they serve as some of the basis for projectedsynergies and high acquisition price justifications in merger-and-acquisition transactions.
This category includes intangible assets such as know-how, competencies, culture,training, reputation, employee competency, company commitment, industry experience,customer relationships, and decision-making capabilities.

Monetization Options
To monetize intangible assets, companies need to understand capital market options.
There are licensing mechanisms for turning certain intangible assets, such as patents,
copyrights, and trademarks into revenues. But these are limited to the cash flow
generated, rather than being the source of large blocks of investment capital. Capital for
intangible assets can be garnered from a number of sources, such as banks, equity
markets, debt and securities markets, private equity firms and venture capitalists. These
resources have varying degrees of understanding of and support for intangible assets, andthe opportunities and limitations of each source will dictate their usefulness inmonetization.
There are three types of buyers: owners, long-term investors, and speculators. Using thereal estate example, the owner buys the house to live in. The investor buys the house torent out. The speculator buys the house to fix it up and sell it for a profit. All three buyers
have their place in the market. In terms of intangible assets, those seeking assets to usethem in their own operations (owners) have been almost the only buyers in the market.
Long-term investors and speculators are only recently emerging as major market players.
Equity Markets
Much of the focus on intangibles by business leaders and writers is correctly focused on
how to identify and use intangible assets, including IP, within the organization for greater
revenue generation. The internal use of intangible assets for higher profitability is theeasiest form of monetization. The task of capturing that valuation is the job of the equities
markets.
The degree to which the equity markets do or do not capture the value of intangible assets
is hotly debated. Some have argued that a large portion of companies’ stock market value
is intangible.143 It has been estimated that book value is less than 35 percent of market
capitalization, and that the total value of intangibles is 79.7 percent of market
capitalization (15.5 percent captured within book value and 62.4 percent not reported on
the books).144 Others point to that fact that national statistics show overall market
capitalization to be generally below the market value of corporations’ tangible assets(mainly real estate).145
What is clear is that equity markets have historically valued companies above and beyond
their tangible assets. Unlike the loan market, which values assets by their explicit

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properties, the equity market seems to incorporate the implicit nature of intangibles inoverall firm valuation. Stock prices capture more than just the present value of existing
cash flows and the book value of assets. The overall ability of the company to utilize allof its assets, tangible and intangible, to deliver future profits and thus enhanceshareholder equity accounts for the market price of company stock.
Research has shown that stock share values reflect the contribution of intangible assets tocompany profits and growth. For example, the UK Design Council found that British
companies with a strong design component (an intangible capability) outperformed othercompanies in the stock market.146 In an intensive analysis, Communications Consulting
Worldwide concluded that 27 percent of the stock market value of one major U.S.
industrial corporation could be attributed to intangibles like reputation.147 Choi et al.
found that “results indicate that the financial market positively values reported intangible
assets,” and note “a positive relation between the book value of intangible assets and themarket value of common equity.”148 Stock prices may mimic investors’ long-term
expectations of profits, valuing certain intangibles that, as Hall argues, could be expected
to become future cash-generating resources for the firm.149
However, equity markets also have a painful history of mispricing these assets. Choi etal. also note that “the market’s valuation of a dollar of intangible assets is lower than its
valuation of other reported assets.”150 The dot.com boom was one example ofoverpricing, where the perceived future value of many Internet enterprises seems now tohave been illusory. On the flipside, equity markets also have a proclivity to undervalue
intangible assets, as evidenced by the fact that a stock value drops nearly every timecompany announces a new research program. This inconsistent treatment of intangibles iscontrary to the rational market model. Zhang argues that “the predictive power of inferredintangibles is consistent with market inefficiency.”151
The degree and expectation of firm value associated with intangible assets differs acrossindustries. Technology and pharmaceutical companies are heavily invested in intangibles
and much of their valuation seems to reflect that fact. Nonetheless, accounting standards
do not require all of a firm’s intangibles to be valued, and have little means to oversee thenumbers that firms report on their financial statements. Investors, one could argue, aremore exposed to risk in intangible-heavy industries since they have relatively lessinformation from which to determine accurate firm valuations.
It would seem then that a firm can use some of the embedded assumptions of equity
market investors to monetize intangible assets. The stock market expects the intangible
assets of companies in intangible-laden industries, like biotechnology or software firms,
to be more valuable than those in other industries, like manufacturing. If investors canimagine the value of the intangibles within a firm, their market valuation of the firm
could rise as a result. A firm’s reputation and standing in the market, for instance, tends
to support higher equity market valuation.
According to a recent survey of 200 Wall Street financial professionals, 62 percent ofrespondents agreed or strongly agreed that Wall Street takes patent portfolios into

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account when assessing company values, but only 22 percent thought patent values werereflected in cash-flow projections or in comparable company/multiple analyses. Morethan 50 percent thought patent values were uncertain and that they didn’t have enoughinformation or knowledge to assess patents.152
An inextricable link to market valuation of companies is merger-and-acquisition (M&A)
activity, including buyouts (private equity). While not all M&A activities are driven by
perceived low stock value, bargain hunting is a major driver. The difference between themarket’s valuation of a company and what an investor sees as the total value of tangible
and intangible assets can trigger the process. It is unclear the extent to which perceptionsof intangibles drive M&A activity. It is clear that intangibles are gaining an importantrole, especially in strategic mergers in technology fields. Often the value of theintangibles is not factored in until late in the process. But Sterne and Laurie argue that IP
should be explicitly considered during the target stage in M&A, not just at the end stageof due diligence.153 They believe that early attention to IP will insure optimal integrationof assets and may provide warning signals of future IP problems. The role of intellectual
property as part of M&A deals seems to be increasing as legal due diligence on the IP
portion of the deals is increasing.154 In addition, as will be discussed later, securitizationof intangible assets is beginning to show up in leveraged buyout processes.
Thus, a common form of monetization of assets (tangible and intangible) is one of themost traditional: sell the company, either in whole or in part, through issuing stock.
A variation of this, somewhat akin to the venture capital route, is to spin off a newcompany from an existing entity. In this case, the basis for the new company alreadyexists and is simply separated from the parent under different ownership (public or
private). Recently, OceanTomo and Blueprint Ventures came together to set up a
program to foster technology-based corporate spin-offs.155
Licensing
One of the easiest and fastest ways for monetizing individual intangible assets outside of
the capital markets is by creating revenue streams through licensing. As Lamoreaux and
Sokoloff point out, trade in patent rights, both through sale and licensing, was wellestablished in the United States by the mid 19th Century.156 Companies sit on stockpilesof underutilized or wholly dormant intangible assets, generally in the form of intellectual
property such as patents, trademarks, and trade secrets (proprietary processes ortechnology). Often a little creative exploration can unearth useful solutions and potential
applications for intangible assets, many times even outside of the industry that createdthem. For instance, a patented design feature used to streamline an aircraft may work toenhance fuel-efficient design in automobiles. Or, a copyrighted rock-and-roll song may
contain lyrics and rhythms that work well for the television ad of a motorcycle company.
By assessing the real value of these assets and exploring the revenue opportunities they
possess, a company can find within itself a treasure trove of unrealized value.

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Many firms have found a lucrative market licensing their patents, copyrights, trademarks,
and trade secrets to other companies. The most common form of licensing involves
trademarks and copyrights. In fact, the entire publishing, film, and music industries aregigantic copyright licensing machines. Licensing of patents is also a standard company
operating procedure. While it is true that a company may obtain a significant competitive
advantage by having the exclusive rights to a particular technology, it is also true thatlicensing patents to firms in noncompeting industries does not hurt its competitive
standing and can generate significant income for the company. In fact, licensing income
often helps to finance additional innovative R&D activities. It has been estimated that
IBM receives 5 percent of its total income from licensing revenues; DuPont, 8 percent;and Amgen, 17 percent.157
Trade secret licensing is less common than licensing of other forms of intellectual
property. The requirement of maintaining secrecy can make sharing of the informationdifficult. Such a requirement is not necessarily an impediment to licensing, however. For
example, in 1881 the formula for Listerine was licensed by its inventor, Dr. Joseph
Lawrence, to Jordan Wheat Lambert, founder of Lambert Pharmaceutical Company.
Importantly, that licensing agreement was the subject of a major court case that decided
that, as Halligan notes, “[e]ven if a trade secret subsequently enters the public domain,
royalty payments under trade secret licensing agreements can continue indefinitely.”158
For all its normality in the history of business, licensing is still not as commonplace as it
could be. The potential for licensing, especially in technology, is still developing.
Licensing of technology—also known as technology transfer—is not necessarily astraightforward process. Malackowski notes that “even today, IP licensing remains a
hand-to-hand combat business where it often takes six to eighteen months to complete adeal, and this comes at significant costs.”159
Both ends of the transaction can be oblique. Often the holder of the patent does not know
the value or the possible uses of the technology, does not assess its value to all possible
uses within the organization, and does not have means to determine its potential
applications across markets outside the one in which the organization operates. Potential
users may not even know of the existence of the technology. In addition, technology
transfer issues go far beyond simply the identification of the buyer and the seller and thestructure of the deal. The use of the technology requires additional transfers of know-how
and tacit knowledge as well. As we will discuss later, these difficulties can greatly hinder
the process of IP licensing (and sale).
There are two other methods of obtaining cash for intangible assets—generally patents—that are linked to sale and licensing: donations and litigation.160 Under IRS regulations,
intellectual property can be donated to a nonprofit, oftentimes a university. New rules,
however, limit the value of the tax deduction of the future royalties.161 Litigation(discussed later) is also an alternative means of raising cash either through mandatoryroyalties or through damage awards.

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Sale of IP
Along with licensing, the outright sale of intangibles, especially ones that have the ability
to draw varied interest due to their pliability and adaptability, is a common option for
raising capital. Take the case of patents, which can be readily applied to other forms ofintellectual property. As Abril and Plant have described, individuals, small companies,
and even large firms have a limited number of options when it comes to utilizing theirpatents.162 They may use the patented technology themselves, building a business around
it. However, individual patents are often not enough for a complete product, especially in
information technology. Even if the patent is sufficient, for a new drug, for instance,
individuals and small companies often do not have the resources necessary to exploit thepatent. In the case of a large company, the patent may not be related to their corebusiness. Or it may be part of a larger portfolio of patents needed for a product, some ofwhich are held by other companies. In all of these cases, licensing, cross licensing, andsales of the patent become the strategies of choice.
An example of monetization using the sale and leasing of patents is the $50 million
patent deal between Motorola and GE Commercial Finance. Motorola sold a portfolio of
noncore company patents to GE Commercial Finance for cash and a share of futureroyalties. GE will provide patent licensing, enforcement, and maintenance.163
The difficulty in the sale of patents, as in the case of licensing, is one of technology
transfer—discussed above. Even if the issues of direct technology transfer are solved,
there is the lack of a secondary market for these products. Numerous companies exist toact as brokers and managers for the licensing and sale of patents, but these do notnecessarily add up to a secondary market.164
Other forms of intellectual property, especially copyrights, have a long history of beingbought and sold. For example, singer Michael Jackson and Sony own the rights to someof the Beatles’ songs, whereas ex-Beatle Paul McCartney’s MPL Music Publishing owns
the rights to many old standbys. Again, there are numerous brokers, especially on themusic-licensing side of the business.
New mechanisms for buying and selling of patents are emerging. The Danish Patent andTrademark Office runs an online IP Marketplace.165 There are also Web-based patentexchanges, such as ipAuctions.com and FreePatentAuction.com.166 The investment firm
OceanTomo has pioneered patent auctions.167 The first auction was held in April 2006,
with a number of subsequent auctions. The next auction is scheduled for April 2008.
During the first auction, only about half of the items were sold because bidders did notreach the sellers’ reserve prices. However, all items were later sold in off-auction floor
negotiations.
Another relatively new phenomenon is the emergence of the patent holding company.
Such companies buy the patent rights to obtain the royalty rights—and in some case to beable to more aggressively license the technology. One such company, Royalty Pharma,holds the rights to a number of drugs.168 For example, in 2005, Emory University sold its

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royalty rights in a HIV drug to Gilead Sciences and Royalty Pharma for $525 million.169
Royalty Pharma purchased the rights to the drug HUMIRA® from AstraZeneca in 2006
for $700 million.170
A variation on this model is Symphony Capital, which provides funding for drug clinic
development.171 Symphony sets up a separate joint venture with the originator of the drugfor the clinic development phase. In one deal, Symphony Evolution and the biotech
company Exelixis gain access to $80 million in exchange for the rights to three cancer
drugs. The twist to this model is that Exelixis also entered into a repurchase agreementthat allows it to buy back the rights at a 25 percent premium.172
The dark side of the patent holding company is the so-called patent troll. Such companies
are building on the business model of infringement lawsuits to collect royalties anddamages rather than licensing. Sullivan explains that—the term applied to companies that, while having no technological operations of
their own, acquire and aggressively assert dubious patents against entire
industries, hoping to obtain settlements based upon alleged infringers’ desire to
avoid the high costs and uncertainty of litigation (especially in jurisdictions, suchas the U.S., that afford significant advantages to plaintiffs in litigation or thatallow for the imposition of substantial, unrecoupable litigation costs on
defendants).173
Debate rages over who is and is not a troll and over whether such patent trolls, with theirvigorous hunt for infringers, are good for the patent system. Regardless of whether thebusiness model is based on aggressive licensing or on infringement litigation, patent
holding companies are becoming an important mechanism for the monetization of
intellectual property.
The process of IP sale and licensing may get a boost from the OceanTomo’s work tocreate an Intellectual Property Enterprise Zone to “facilitate technology transfer through aphysical collocation of technology buyers, sellers, licensors, and licensees as well as anelectronic intellectual property exchange.”174 The electronic IP exchange will “enable
investor and company participation in a broad spectrum of IP-related financial products
such as qualified equity listing/co-listing; IP-related indexes, futures, and options; IPbacked debt instruments; patent-rich company IPOs [initial public offerings]; and new IPbased exchange-traded products.”175 M-CAM is also expanding its financial activities.176
Additionally, the National Knowledge and Intellectual Property Management Task Forceis working on ways of facilitating IP transactions.177
Banks and Loans
The most direct way of tapping capital markets is through direct lending. Lending on
intangibles is not a completely new phenomenon—even if it is not explicit. As Hall
points out:It’s often assumed that banks aren’t concerned with measuring and evaluatingintangibles beyond characteristics of a business such as goodwill and patents

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which currently feature in established accounting standards. Intangible and latentcompetencies such as competitiveness or quality of management have in fact been
incorporated in credit risk analysis for some time, albeit intuitively andsubjectively, and with neither a common language nor explicit measurement.178
The IP consulting firm Consor Intellectual Asset Management claims that IP lending has
moved even beyond that stage, noting:In the past, many banks and other lenders required that the IP be included in any
financing arrangement along with the other assets used to secure the loan. Now,
however, IP owners are beginning to realize that these assets can generatesignificant financing options on their own. Rather than have the IP act asinsurance above and beyond the required collateral, trademarks, patents, andcopyrights have been pledged as the primary source of collateral in a wide rangeof situations.179
A recent survey of small and medium-sized high-tech companies in New England
revealed that 18 percent of the companies surveyed said they had used patents as
collateral to secure financing.180
Intangibles can come into play in the lending process in two ways: as collateral and as afactor in determining the credit rating. The latter seeks to determine the ability of theborrower to repay the loan and therefore the probability of default while the former helps
determine the extent of a possible loss in case of default. The credit rating is the firstscreen, with collateral then used to adjust the rating depending on the value of thecollateral. Traditionally, the credit rating has been determined by cash flow—i.e., theborrower can sustain the debt service requirements. Total debt payments, cash flow, total
income, and related factors are used to make this determination.
In fact, it has been argued that collateral (tangible or intangible) is almost irrelevant to thelending decision, which is driven by cash-flow considerations. The Brookings Institution
Task Force on Intangibles put it this way:
To be sure, lenders, including banks and insurance companies, and theirregulators, consistently reported that their rules and standards for evaluating
creditworthiness do not discriminate against borrowers whose assets are primarily
intangible rather than tangible. They noted that credit risk does not depend on thenature of the assets; neither intangible assets nor bricks-and-mortar have intrinsic
value if they are not used for something. Thus, they insisted, it is thecharacteristics of an entity’s cash-flow generation that determines the amount ofcredit it should receive.181
Others, such as the pathbreaking microloan organization Grameen Bank in Bangladesh,
rely on peer pressure and joint liability, rather than on collateral, to insure repayment.182
That said, there is still a role for intangibles. First, intangibles can help determine the
cash-flow-generation possibilities. Both existing and potential royalty streams directly
derived from the intangibles, such as a licensing agreement, can be used to determine

Intangible Asset Monetization – Athena Alliance36

discounted cash flow. Second, collateral is still important in determining the final
structure of the credit. For example, a person with the same exact cash flow will get amuch better rate on a collateral-backed home mortgage than on an unsecured line ofcredit.
In the case of intangible assets, large banking institutions like JP Morgan Chase, Credit
Suisse First Boston, and Bank of America, to name just a few, offer loans secured byintellectual property assets. These intangibles, generally in the form of patents,
trademarks, and copyrights, find some credence from lenders since they are reasonablytransferable and can act to support credit institutions against default risk. For example,
pop star Michael Jackson used his portfolio of songs by the Beatles and other songwriters
to collateralize a $270 million loan, which was refinanced in 2006.183
IP assets have also been used as collateral for second-lien loans and mezzanine debt.
Acting as a hedge on loans issued as subordinate financing to tangible, real property
assets, these assets can provide the lender with an unencumbered collateral asset in caseof default. Generally, these products are only available to large and mid-cap companies
with more than $100 million in assets and strong credit histories. The element that makesthese loans so attractive to lenders may be their high rates of return, often 600 to 800
basis points above the London Interbank Offered Rate (LIBOR).184
Banks with ties to specific industries can build up an expertise in intangible-based
lending. According to Billboard magazine, “In Nashville, SunTrust has been extendingloans to artists for about 26 years in which their intellectual property—in this case, theirsongs—serves as the collateral. [Brian] Williams [SunTrust’s director of music privatebanking] says that’s a ‘garden variety’ product for his bank as well as for others in
town.”185
Such lending can be prospective as well. For example, Royalty Advance Funding in Los
Angeles offers both cash advances to musicians and songwriters and buys musicroyalties.186 Likewise, Content Partners LLC buys the rights to future payments for films,
television programming, and music from writers, producers, actors, and others who need
immediate liquidity.187
Presidential candidate Sen. John McCain (Ariz.) even used his fund-raising list as
collateral for a campaign line of credit.188 In this case, the bank required that the
campaign take out an insurance policy to backstop the loan in case the candidate would
not be able to continue fund raising activities.
Lending institutions have not traditionally favored loans solely collateralized byintangible assets. Historically, IP has only been used to enhance loans made to real asset
or receivables loans.189 According to Bergelt and Meintzer, IP is used with a loan-tovalue ratio of 10 percent to 40 percent compared with 50 percent for physical plant andequipment.190

Intangible Asset Monetization – Athena Alliance37

Bankers view IP collateralized assets as loss hedges on loan funds. They evaluate thehistorical returns correlated to the IP collateral and heavily discount the projected future
earnings attributable to the assets. Often they also compare like assets across a company
or industry to determine an appropriate valuation. Most IP assets merely act to improve
the risk character of the loans they back. While every effort is made to lend only tocredit-worthy corporations, commercial bankers will often seek collateral as a credit
enhancement for the loan. In a worst-case scenario—absolute payment default of theborrower—the bank can claim the collateral and resell it to cover the loan.
Intangible asset collateralization for lending faces several potential problems. Can theasset ownership be transferred without encumbrance to the lender in case of loan default?
Can the banker discern an appropriate, fixed value for the asset over the term of the loan?
Because of these concerns, lenders find the risk of supporting loans with assets limited toonly subjective valuations and nebulous risk profiles as too great without either additional
tangible collateral or a third-party credit enhancement. Recently, many intellectual asset
consultants have sprung up to help satisfy lenders’ concerns. Organizations like Brody
Berman Associates provide valuation and due diligence services on IP. To reduce risk to
the lender, insurance companies like MBIA Insurance Company and Swiss RE New
Markets offer a number of forms of credit enhancements.
The combination of valuation due diligence and credit enhancements may make the deal
secure enough to be supported by the intangibles. Edwards explains how this works:
GIK Worldwide is a small company based outside San Francisco. They are thepatent holders of a groundbreaking technology that delivers high-speed broadcast
quality video conferencing over twisted copper wire. Like many such technology
rich companies, they were running out of cash and either did not want to or could
not tap the venture capital markets. Taibbi Ltd, a Boston based boutiqueinvestment bank and IP management consultancy put together a financing
package that raised $17MM [million] in debt provided by Pitney Bowes Capital
based on an appraised value of $57MM. Pl-x provided the valuation, Intellectual
Property Insurance Services of Louisville, KT provided IP value insurance toprotect the lender against loss in value of the patent, and XL Capital of Bermuda
provided the financial guarantee. The entire process took less than 90 days tocomplete.191
Two other examples of credit enhancements by IP Innovations (IPI) provide further
illustrations. In late 2004, GMAC Commercial Finance provided a $43 million loan to
Palladium Equity Partners, a New York private-equity firm, backed by the trademark of
its Wise Foods snack-food lines. The five-year deal was credit-enhanced by IPI, whichguaranteed $7 million of the deal in exchange for a priority-secured position on all the IP
of Wise. This deal used the brand and trademark value of the snack-food company tocollateralize the term loan. The intangible assets were the sole collateral for the deal.192 In
September 2004, IPI also backed a $15 million credit facility issued by London’s Lloyds
TSB to Cambridge Display Technology (CDT), a maker of polymer organic light-

Intangible Asset Monetization – Athena Alliance38

emitting diodes for flat-panel displays. The three-year revolver loan was supported by
CDT’s patent and trademark assets.193
Another interesting twist is the use of intangibles in the bankruptcy process. As Aston
explains:
Intellectual assets—including IP and intangibles—have taken on a new level ofimportance, respectability, and legitimacy for those institutions involved inbankruptcies. For example, providers of IP financing or loans to insolvent
companies, or exit financings for those emerging from Chapter 11, often consider
using the company’s intellectual assets or IP as collateral.194
Nonetheless, overt market prevalence of IP collateralized loans has yet to emerge. Manylenders still do not feel comfortable with the assets. They question how the assets shouldbe accurately valued and financially projected. Patent infringement or brand-nameerosion, for instance, could greatly diminish an IP asset whose value had been supported
by a strong history of financial returns and renowned standing. Eustace noted this in his
2000 paper Intellectual Property and the Capital Markets: “With respect to the use ofintangible assets as debt security, in the mainstream corporate lending market, bankers
generally do not take explicit account of intangibles as collateral for loans.”195 He
acknowledged that in Europe there are “a range of issues for the city banks andinvestment institutions, whose lending policies and credit risk models face deep-rooted
conceptual and practical difficulties in keeping pace with the changing corporate value
schema.”196 A 2006 report by the Organization for Economic Co-operation andDevelopment (OECD) showed some progress, stating that “[g]reater attention is being
paid in OECD countries to the use of IP as collateral for bank loans,” but that use “of IP
as collateral for bank loans remains limited, largely because of limitations invaluation.”197
As banks start to better understand IP assets, they will undoubtedly begin to greatly
enhance their use of them to leverage loans and to make confident in-house creditanalysis decisions.
Many intangible assets, though, are enterprise-specific, making it difficult if not
impossible to transfer ownership rights. They do not serve as useful loan collateral. While
enterprise-specific intangible assets such as firm competency, reputation, and managerial
expertise support the credit decision of the banker, they are not likely to serve as defined
credit enhancements on their own. However, short-term lines of credit are often extended
collateral-free and undoubtedly reflect the banker’s recognition of these factors as criticalvalue components in the underwriting of the loan. Certainly the relationship between
company and banker, fostered from previous dealings, provides a valued form of asset
that acts like tangible collateral.
Asset-backed Securitization and the Securities Market
Another route to the capital markets is through the debt market using the mechanism ofan asset-backed security. The SEC defines an asset-backed security as—

Intangible Asset Monetization – Athena Alliance39

securities that are backed by a discrete pool of self-liquidating financial assets.
Asset-backed securitization is a financing technique in which financial assets, inmany cases themselves less liquid, are pooled and converted into instruments that
may be offered and sold in the capital markets.
[P]ayment on the asset-backed securities depends primarily on the cash flows
generated by the assets in the underlying pool and other rights designed to assure
timely payment, such as liquidity facilities, guarantees, or other features generally
known as credit enhancements.198
Most securitized assets are largely homogenous, highly liquid assets that can be easily
traded and purchased in open markets, such as mortgages, credit card receivables, autoloans, and other financial instruments. Asset-backed securitization (ABS) has been
growing rapidly, from $500 billion in 2000 to $3 trillion in 2006 and is well establishedin global markets.199
Arguably, securitization could seemingly grab any firm asset, including assets beyond thebounds of the balance sheet, and make a market for them. If an asset can generate cash
streams, its value can be ascertained and leveraged to draw potential interest from thecapital markets. Note that intellectual property is but one of numerous types of assets thatare subject to securitization, including both traditional and esoteric asset classes.200 These
include assets such as equipment leases, sports franchise fees, and property tax liens.
While the idea of intangibles as an asset class may seem revolutionary, the understandingof their respective securities need not be. Securitization of intangibles is simply an
extension of these existing practices that started with mortgage-backed securities and arebeing refined with these other esoteric asset classes.
The promise of future revenues has long been used to raise funds for intangible activities.
For example, Broadway shows are funded through the sale of shares. Seed money
invested in an artist—or more acutely, the artistic talent of an individual—for instance,
could eventually lead to a stream of royalties on the art that the person creates. Artist
Sharon Louden and her commodities-trader husband have taken just that route. They
solicited investors to buy shares in a sculpture in process for an exhibition at the Kemper
Museum of Contemporary Art in Kansas City, Mo. The piece was later sold for enoughof a profit to provide the investors with a satisfactory return.201 While Louden was
already recognized as an artist, an unknown artist whose work is endorsed by anestablished artist is arguably an untapped reserve of future revenues. Thus, talent, anelusive intangible, becomes a marketable asset for capital generation.
One of the first intangible asset securitization deals occurred in 1997 when the Pullman
Group’s Jones/Tintoretto (a.k.a. “Bowie Bonds”) deal securitized offerings based on therecord master and music-publishing royalties of rock star David Bowie.202 One of the firstdeals using patents was in 2000 when Royalty Pharma securitized the Yale University
patent to the drug Zerit.203
In 2005, IP Innovations estimated that there are about $1 billion in IP-backed deals eachyear.204 Intangible-based securities aren’t even a blip in the overall ABS market, with

Intangible Asset Monetization – Athena Alliance40

almost $3.6 trillion outstanding.205 However, interest in the securitization of intangible
assets appears to be growing. According to Jay Eisbruck:
In recent years the securitization of various types of intellectual property has
evolved from a small niche market utilized by individual artists or thinly
capitalized companies to a broader corporate financing tool used to facilitate
mergers and acquisitions, stock buy-backs, and risk transference to investors.206
Music catalogs provided the early movement, with a flurry of deals following the Bowie
Bonds model.207 However, the music industry activity has slowed.208 More recently, theexpected securitization of music publisher EMI’s music catalog has apparently fallen
victim to the current credit crunch.209
While securitization of music has not grown rapidly, the technique has been adopted by
the movie industry.210 It is expected that securitization of film rights will continue togrow.211 More recently, Morgan Stanley set up a new private fund to sell bonds backed
by the revenues generated by films released by Paramount Vantage.212 In 2005, Merrill
Lynch recently created a $465 million revolving credit facility for Marvel Entertainment,
insured by Ambac Assurance using the film rights to the comic characters and the movie
revenues as collateral.213 However, such deals are also requiring stricter covenants given
previous problems.214
The area of franchise fees and trademarks/brand names has also expanded, including
brands such as Arby’s, Athlete’s Foot, and Guess.215 In these deals, rights to thetrademark and franchise fees are transferred to a special purpose entity (SPE), which sells
bonds backed by the royalty stream (see Appendix B). Royalties flow directly to the SPEwith the parent company receiving a management fee for administration and marketing.
Such deals are sometimes referred to as Whole Company Securitization because theyessentially take a firm’s entire cash-flow stream and securitize it.
More recent deals have increased in size. The 2006 Dunkin’ Brands securitization of its
franchise and trademark royalties raised $1.7 billion.216 That same year, KCD IP (whichowns the Kenmore, Craftsman, and DieHard intellectual property for Sears) structured a$1.8 billion securitization deal with a twist on the model where there was no outsideroyalty stream and no outside capital.217 In March 2007, Moody’s issued a rating for abond offering of almost $1.8 billion by Domino’s, backed primarily by the pizza maker’s
intellectual property and franchise agreements.218
Patents have long been seen as a promising area for securitization but one that has yet tolive up to that promise.219 The most cited examples have involved pharmaceuticals andthe early attempts have been mixed. In 2000, BioPharma Royalty Trust securitized thepatent for the HIV drug Zerit, developed at Yale University. Standard & Poor’s rated thebond issue of $115 million single A. But lower-than-projected sales resulted in violationsof the deal’s financial covenants for three consecutive reporting periods and, inNovember 2002, the deal entered into the phase of what in financial-speak is called“early amortization.”220

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41

That experience led Royalty Pharma to become more of a whole enterprise securitization
form of transaction in July 2003.221 The $225 million deal was backed by a portfolio of
13 patents, structured by Credit Suisse First Boston and insured by MBIA InsuranceGroup. Moody’s and Standard & Poor’s gave the deal an AAA rating. Royalty Pharma
has since expanded this original debt facility through additional securitization andrefinancing, using those funds to acquire rights to additional pharmaceuticals.222
Using intellectual property as an alternative to existing funding mechanisms inpharmaceuticals has drawn a good detail of attention.223 But pharmaceuticals may be a
special case. Because of the need for Food and Drug Administration (FDA) approval,
these products may have a more secure position once they make it through all theregulatory hurdles. As Eisbruck notes:
Compared to other technology patents, pharmaceutical royalties are better suited
to securitization due to the high barriers to entry in pharmaceuticals—largely due
to the long development and regulatory approval processes for drugs. This
generally makes the risk of obsolescence lower than for other types of technology
patent, reducing the potential variability of future royalty payments.224
However, Dorris and Wilkes note that pharmaceuticals face a special set of challenges.
The need for FDA approval can be a two-edged sword, raising the risk of failure before
the product even hits the market place. Other challenges include National Institutes of
Health (NIH) patent reach-in provisions and special patent-waiver provisions in cases of
HIV/AIDS drugs for use in third-world countries.225 The difficulties—especially in theconcentration of risk involved and the need for a large pool of patents—are such that
Eisbruck expects only modest growth in this area.226
Another version is the Patent Investment Entity (PIE) structure used by TEQ
Innovations. A combination of a real estate investment trust and equipment-leasing
model, it raises funds from investors and lenders to acquire patents, which it then licenses
back to the original owner. This allows companies to monetize current core patents aswell as create a vehicle for holding and leasing non-core patents.227
In all the above cases, the predictable revenue streams from the licenses supported the
securities. This cash-flow securitization uses the expected returns generated by the asset
to determine the return of its associated security. Historical returns from the asset provide
a discounted cash-flow method of valuation that can quite easily formulate expected
returns on assets such as patents, copyrights, and royalties. Contractual agreements on
intangible assets, like franchise agreements or trademark licenses, also make returncalculations relatively simple. A firm could also estimate the expected returns fromcomparable asset categories to project expected returns on assets without having access touseful historical data due to the newness of the asset or after significant structuralchanges to it.
This method of securitization promises to offer attractive options for companies sitting onother forms of intangible assets as well. Contractual agreements may also provide thecreative means to securitize intangible assets for an enterprise. Since many service-basedIntangible Asset Monetization – Athena Alliance42

industries, such as high tech or health care, find the preponderance of their value in
intangible assets resting in contractual relationships and know-how, these industries
could find the greatest benefit from securitization. For instance, let’s say a computerconsulting firm contracts its services to a manufacturing firm for a fixed monthly
payment for the next 12 months. The contract provides a fixed income stream as well as agood approximation on risk for the returns. In effect, the firm has captured an intangible
asset, its technological know-how, and created a fixed income stream that could bebundled with all its other consulting contracts to support a cash-flow securitization.
Furthermore, other forms of intangibles that are based on market valuations might also be
used in securitization. Here assets whose value can be independently appraised by auniversally acceptable method, such as mining rights, are used as collateral to support the
security. Asset value is found by either determining a value based on a known value of acomparable asset or through historical expectations of assets with like characteristics or itis determined by estimating the replacement value of the asset or cost to obtain it. With alittle creative thought, this securitization category can encompass a significant array ofintangible assets. Mining rights, leasehold interests, noncompete covenants, ordevelopmental rights all serve as assets with comparable counterparts.
Such activities may increase now that hedge funds and private equity funds are beginningto see the value of IP portfolios and securitization.228 The Dunkin’ Brands securitization
was used to raise funds to support the leveraged buyout.229 Once EMI started discussing
the potential for securitizing its music catalog, it became the target of rumors of a private
equity takeover.230 The eventual buyer, Terra Firma Capital Partners Ltd., has a history ofusing asset-backed securitization for acquisitions and had apparently planned to securitize
the catalog. However, recent problems in the credit markets have reportedly put that planon hold.231
The problems of EMI and Terra Firma are emblematic of how the recent troubles in the
subprime mortgage market may cause investors to shy away from the entire sector of
asset-backed securitization. Guha and Callan note that investors “have lost confidence intheir ability to value complex structured credit products that include some exposure to
subprime [that is] bundled up with exposure to other underlying assets.”232 Intangible
asset-backed securitization may be too esoteric for the market to swallow in its present
state. In addition, the tightening of credit standards in the mortgage area also may makeintangible deals too expensive for borrowers by either giving such deals a lower bondrating and thereby increasing the interest rate demanded by the market or by requiring
greater levels of insurance.
As it becomes clearer just how much these instruments have disrupted the credit markets,
investors are left wondering why the risks of these securities were so misunderstood.
Quite clearly, the assets that made up these securities—loans to risky borrowers—were
not as strong an asset as investors, financiers, and the ratings agencies originallysurmised. In the process of markets pulling back from the enormous amount of loan
defaults and the consequential diminishment of securities value, the near-term promise ofintangible asset securities will likely be greatly hampered. Since these assets have aIntangible Asset Monetization – Athena Alliance43

tendency to be difficult to value and risk-assess, they will be held to even greater scrutiny
by potential investors.
Nonetheless, it is still too early to accurately predict the long-term ramifications of recent
events. Markets have traditionally been both resilient and elastic as they continually seekout innovative means to move capital and deliver returns. From calamity may spring
opportunity. Intangible-backed deals tend to be overcollaterized with extensive credit
enhancement (insurance and performance covenants) structures. Such enhancements may
make these deals attractive to investors still smarting from the covenant-‘lite’ deals
backed by no-document loans. Performance problems of the kind we have seen in the
subprime market have not, to date, been repeated with respect the intangible asset-backed
deals. Intangible assets could prove to be palatable to investors looking for instruments
built on varying asset classes to better balance their respective systematic risk tolerances.
Ratings Agencies and Credit Enhancement
The ratings aspect of the securitization process requires special mention. Like for any
other security, an independent analysis is performed by a ratings agency to assure theissuer’s capacity to fulfill its debt obligations. This analysis takes an intimate,confidential look at the financial condition of the issuer to determine the credit risk
assumed by the investor who purchases the debt issued by the entity. Institutional
investors often require a rating, usually performed by one of the three major ratings
agencies—Standard and Poor’s, Moody’s, and Fitch—to comply with legal or selfimposed guidelines on investment quality.
The role of intangible assets in the ratings process may be hard to quantify. Rating
agencies have to take into account a number of qualitative factors, such as the ability of
the artist to continue to promote his or her music.233 The ratings agencies seem torecognize value, but in a nonspecific way, as Adele Del Bello notes:234
Despite the frequent reference to specific intangibles in their ratings manuals—it
appears that there is no algorithm or procedure to track down in a systematic andformalized way the role of intangibles in the evaluation process. Nevertheless, thepresence of these assets—and in particular human capital—seems often to berelated with the granting of high levels. The credibility of management—that is,
its ability to realize its ambitions and plans—is crucial to the ratings process. It
also emerged that intangible assets can have a weight on the final credit rating of
up to 20-35% according to different industries.
As is the case with collateralization mentioned earlier, securitization packages are often
structured to provide a credit enhancement to reduce the unknown risk. Even in the
Bowie Bonds deal, there was a form of credit enhancement because EMI (Bowie’s
distributor) provided “guaranteed payments and other structural enhancements.”235
The structure of the enhancement can take many different forms. A common structure isbond insurance from a so-called monoline insurer.236 The bonds issued in the Domino’s

Intangible Asset Monetization – Athena Alliance44

securitization were insured by MBIA Insurance Corporation and Ambac Assurance
Company, two of the most well-known monoline insurers.237
But, as the S&P framework for evaluating a securitization deal highlights, there are
multiple means of creating a structural enhancement, such as liquidity reserves andtriggering events.238 The Dunkin’ Brands’ deal contained a set of performance measures,a “cash trap” (a reserve account mechanism), and an insurance policy.239
This credit enhancement can be the make-or-break factor in an issuance because it
determines the final cost of capital. The bond house PIMCO explains it this way:
Typically, the originator aims to obtain a credit rating on the ABS that is higher
than its own rating and will work with the rating agencies and investment banks toprovide enough credit enhancements to achieve that goal. A higher credit rating
can lower the yield on an ABS and thus lower the originator’s cost of issuing thebonds.240
Venture Capital
Arguably, no market entity has played a more vital role in financially supporting business
innovation than venture capitalists (VCs). These investors have served to bridge thecapital gap between financial markets often hungry only for large proven winners or
established enterprises and entrepreneurs who are restrained by their own limited capital
resources and unproven track record. Venture capital was always about intangibles. The
venture capitalist generally infuses both financial support and managerial expertise intobusinesses that have more potential than physical assets. In other words, they invest in
intangible assets such as ideas or innovations to capture future profits from an enterprisevalue enhancement. But, like the cliché states, VCs usually invest in people not ideas.
Smart, entrepreneurial people will make things happen, even if the original ideas don’t
pan out. Invention, human talent, technological advancement, and proprietary advantage
combine to describe the promise that venture capitalists perceive when they place theirmoney into these enterprises.
Venture capitalists rely on their own unique valuation assessments to determine the worth
and risk of an investment. They are not as limited as loan, equity, and security markets
that must often define a market-prevalent perception of asset value to maintaininvestment liquidity. The valuation schema employed by VCs often varies depending on
the background and preferences of the financier. Most will use cash-flow models andprojections to ascertain valuations, but the flexibility of the capital resource allows
venture capitalists to use internal metrics to also capture perceived values within theenterprise as a whole. If they feel comfortable with the viability of the enterprise in its
entirety, they will often subscribe higher valuation assessments on intangibles without
identifiable cash flows or market comparables. For instance, if a VC feels strongly that
innovative genetic research on prostrate cancer cells looks promising for long-term
profits, he/she may be willing to invest in a relatively new start-up enterprise in that fieldthat heretofore may not have delivered profits or displayed distinct proprietary assets.

Intangible Asset Monetization – Athena Alliance45

The VC may feel strongly enough about the management team and the talent of theresearch team to invest in the intangible assets contained within the enterprise.
Venture capitalists take advantage of the long-term benefits of leveraging the oftenintangible attributes of an operation to deliver impressive future returns on theirinvestment. They often incubate an enterprise’s potential until it delivers the consistent
cash flows necessary for recognition by other capital markets. Consequently, venture
capitalists provide a vital resource for monetizing enterprise-specific intangible assets byincorporating their value into an assessment of the overall potential of the enterprise.
Interplay of Mechanisms
The financial means of raising capital must be aligned with investors willing to buy it.
Thus, numerous complimentary mechanisms must exist. The various options outlined
above, therefore, should not be viewed as either/or alternatives. Nor are they completely
separate activities; they are highly interrelated. For example, securitization benefits
greatly from a primary market in the asset. In fact, one credit enhancement technique is asales trigger, which requires the trustee (holder of the asset) to sell the asset if the revenue
stream drops below a certain point. As Eisbruck explains:If structured properly, such a trigger can be hit before the value of the assets—
which is closely related to the revenue they generate—falls below the remaining
bond balance. At that point, the assets would be sold, and bondholders can be paidoff, albeit earlier than expected, without suffering a loss.241
Such a mechanism only works if there is a market in the underlying asset. In the case ofmusic portfolios, there is an active market—which helped make the Bowie Bonds a
viable financial product.
What is clear is that further monetization of intangible assets will require attention to allof these mechanisms. The new Intellectual Property Exchange in Chicago, mentioned
earlier in this paper, may be one way to link these activities.242

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46

Financial Considerations
A number of factors must be considered by the financial markets to determine thesuitability of an asset, including asset recognition, valuation, separability, transferability,
duration, and risk. Likewise, the nature of the financial marketplace itself needs to betaken into account. Issues such as the liquidity of a specific market and the relative costof capital are critical in the monetization process.
These considerations vary across the different mechanisms for the monetization of
intangibles assets. For example, the sale of a specific patent substantially differs in themarketplace from the securitization of a patent portfolio. Commonalities among the typesof intangible assets exist, as do commonalities across the monetization mechanisms. But
specific differences can determine what is monetized and how.
It is not surprising that various mechanisms for the monetization of intangible assets havebeen slow in developing. Securitization is an offshoot of collateralization;
collateralization often requires the backstop of a working primary market in the asset.
Markets for the sale and lease of intangibles have existed for some time but theregularization of these markets is only a recent development that continues to evolve.

Classification and Valuation
As described earlier, the FASB lists 29 types of intangibles; the earlier AICPA list had
more than 90 separate intangible asset classifications. Such an expansive list illustrates
the extraordinary range of this asset class. One needs a certain level of imagination or an
intimate degree of insight to distinguish all the intangibles in any given firm. These assets
provide substantial existing and potential future value for enterprises, many of whichhave never formally detailed their own intangible asset holdings.
To effectively monetize intangible assets, one needs to transform their characteristics intoquantifiable metrics. Financial markets need to understand the characteristics ofintangible assets so they can calculate their behavior over time. The markets often need toreplicate the past performance of the asset in question or else compare it with another likeasset or set of assets that acts in predictive ways. While many complex models serve tosupport analysis (and ultimately valuation estimates) in the market today, no one model
accurately measures intangibles.
The great variety in types of intangibles complicates the process. Even within a rather
well understood subcategory, such as intellectual property, there are importantdifferences. Philip Walsh states that this comes down to the—lack of homogeneity between different types of intellectual property, as well as
the wide variety of legal regimes that cover such property. For example, computer
software is relatively easy to patent in the United States, while in Europe there areclear distinctions between programs that represent a technological innovation(e.g., a new machine tool—generally patentable) and those that are non-Intangible Asset Monetization – Athena Alliance47

technological (e.g., a program that translates from English to German—nonpatentable).243
This issue will become less of a problem as globalization forces nations to harmonize
their economic standards, such as patent laws. The difference among the various types ofintangibles—patents versus brands for instance—may still require slightly different
mechanisms for valuation. Of course, this is not unique to intangibles but is an issue
already faced daily by analysts dealing with the plethora of asset classes.
Asset Recognition
The first accounting problem with intangible assets is their definition and recognition.244
Some assets, such as formalized intellectual property, are relatively easy to define.
Others, such as tacit knowledge, are all but invisible. Cataloging and recognition (in thenormal sense of the word) are major hurdles.
Recognition usually refers to the technical accounting term of whether the asset isincluded in firms’ financial statements. As discussed earlier, only those intangibles
acquired from outside the firm must be accounted for separately from goodwill under
SFAS 141 and 142; Regulation G restricts the use of non-GAAP financial measures foraccounting purposes. Revenues from intangibles (licensing or sale) are to be incorporated
into the financial accounts, but not the value of the asset unless it is acquired from outside(and only then is it subject to specific rules).
As mentioned earlier, new rules do allow for detailed discussions of intangible assets, aslong as they are not included as depreciable assets in the financial statements. Under
these new rules, the SEC encourages companies to include a wide range of measures thatare believed to be “material” to the companies’ performance in the management
discussion and analysis (MD&A) section of the financial statements.245
These new disclosures do not allow companies to actually book intangible assets. Nor isthere any standardized format for disclosure. As a consequence, intangible asset
recognition on the balance sheet is only broadly addressed, with little insight on value.
However, more and more companies are looking to their intangibles assets as a source ofvalue creation, even if they are not officially recognized in the financial statements. As
mentioned earlier, the Sarbanes–Oxley Act is forcing some companies to review theirsystems of control with respect to intangible assets. The creation of explicit proceduresfor understanding intangibles will help companies better realize the potential of thoseassets—regardless of whether they are recognized in the formal accounting sense.
Such explicit procedures may also come about due to outside pressure. As Malackowski
notes:
There have been more than two dozen IP class-action shareholder litigations, andthey have involved failed process and control matters, such as missing a patentmaintenance payment, overstating the value of a patent portfolio in an IP or

Intangible Asset Monetization – Athena Alliance48

secondary offering, or generally mismanaging or under-managing the IP. One canimagine the discomfort of the CEO or the independent director [who is] sitting on
a volatile pool of assets that can evaporate. The assets are not insured, and if theyevaporate for reasons that were arguably lack of proper management, the CEO
could be sued and held personally liable.246
However, such a defensive litigation approach, rather than a proactive management
approach, would greatly increase the costs and uncertainties.
Separability
For an asset to be recognized under accounting rules, it must be able to be separated fromother assets. Breaking up intangibles into discrete, separable entities is difficult. Often
concomitant forms of knowledge are necessary, including tacit know-how and otherassociated intangibles. Anson points out that for valuation purposes it is important to lookat the bundling of intangibles, not just the individual asset.247 Kossovsky likens
intangibles to the stones of a Roman arch where the loss of any one stone could cause
catastrophic collapse.248
Certain types of intangible assets are easier to separate than others. Those that can beformalized, such as patents and copyrights, can generally be separated. But even in thecase of the most straightforward form of monetization—licensing—a side agreement on
the transfer of know-how is sometimes needed. Likewise, in the securitization of brands
and trademarks, the management and servicing agreement is a key feature, even with asteady royalty stream to underpin the value.
Transferability
Transferability is closely tied to the issue of separability. A major question defining an
asset is whether it can be transferred to other parties without losing value. For intangible
assets, the answer is “yes” only in some cases, as with intellectual property transfers.
However, many assets are purely firm-specific and contain little if any value outside ofthe enterprise that they belong to. As Anson remarks:
Enterprise-value also rests in proprietary methodologies, best practices,
application-specific software, operating systems, enterprise information
infrastructures, and the tools that operate and manage the information needs.249
Even if these assets could be separated, it would be difficult to transfer them in all but themost specific circumstances.
In some cases, the asset defines the enterprise, such as the formula for the lubricant WD–
40. Monetization of this asset is almost by definition the monetization of the entire
enterprise.
Still, one must be careful not to dismiss intangible assets that do not on the surface seemtransferable. Merger and acquisition activity is justified on the need to gain control over

Intangible Asset Monetization – Athena Alliance49

target companies’ tangible and intangible assets. While corporate know-how may be
virtually impossible to transfer from the collective minds of the company employees,
those same employees can choose to leave the company and reestablish a new enterpriseelsewhere, taking extraordinary value along with them.
Companies can protect intangible assets through trade secrets and noncompeteagreements. These intangible assets can prevent the loss of intellectual capital and reduce
the risk of proprietary investments taking on a formidable life of their own outside theenterprise. Maybe the greatest value is the elimination of a potential market competitor or
the eradication of temptation for workers to leave the organization—factors of significant
financial consequence. But this creates yet another form of intangible asset that is hard tomonetize outside of the company because of the narrow enterprise-specific nature of theintangible. A noncompete agreement may be a highly important portion of a company’s
operating strategy and therefore of its overall value. But generally that agreement would
be worthless on the open market as a separate asset. It only has value in the context of theoperations of the enterprise as a whole.
Duration
The duration of the intangibles’ effectiveness is another matter. Different intangibles will
have significantly different lifecycles. Technological advantages in the market can beovercome by competitors with seemingly lightning speed. Yet many patents can deliver
years of returns. What about the lasting value of reliability or reputation? Arguably theseterms are worthless without future protection from absolute upheaval and severe value
diminishment. Key employees can leave, critical customer relationships can fall apart, or
brand value can be eclipsed by better product introductions or systematic consumer
preference changes.
Each form of monetization must deal with the issue of duration in its own way. Licensing
agreements must take into account the length of any intellectual property protection,
which is different for patents, copyrights, and trademarks. In the case of licensing a trade
secret, care must be given to protect the secret as well as deal with the loss of trade secretstatus during the license period.250 Likewise, the sale of an IP asset is based on its
duration. Collaterization and securitization are based as much on the duration of thefinancial instruments that define the structure of the deal than on the duration of theassets.
Risk Analysis
Business is about calculated gambles. Making profit often means leveraging capitalagainst unexpected, but statistically predictive, future outcomes. Yet predictability is
tough to achieve in the global economy. Risks both within a company and those on asystematic, marketwide scale are more numerous and unique than ever. Companies aretaking greater steps to manage the risks associated with intangibles assets and consulting
firms, such as Marsh, are offering more risk-management services.251

Intangible Asset Monetization – Athena Alliance50

However, enhanced risk in business and investment often means enhanced rewards; themore uncertain the expected outcome or the greater the variability of possible outcome of
events, the greater the expected payoff for the investor. This risk/reward calculation
drives the financial system.
There are different types of risks—most notably business or operational risk and market
risk. Operational risk comes from problems or failures in the business operations. Market
risk involves changes in the valuation of an asset due to changes in the financial markets.
Related to these two types of risk is event risk, where unforeseen events can trigger
changes in business operations or market valuations. In the case of licensing and sale ofan intangible asset, the risk is all business and event risk. The asset may not perform as
expected, the business strategy utilizing the asset might be wrong or outdated, thebusiness conditions might change, or the implementation of the strategy might be flawed.
With collateralization and securitization, the element of market risk enters the picture. Allof the operational risks continue, but the factor of the market circumstances adds anadditional dimension.
Determining risks poses a significant issue for monetization. Understanding operationalrisks of intangible assets is relatively straightforward, if sometimes flawed, as
demonstrated by the failure of many mergers and acquisitions. Understanding the market
risk (and reward) of intangibles is much more difficult because many of these assets
behave in very unique ways.
Since we are just beginning to understand the market behaviors of intangible assets, theypose inherent uncertainties for financiers. The returns to investors depend on accurate
estimates of corresponding risk. As risk uncertainty rises, so does the expected return on
investment. Securitization often requires a number of credit enhancements to reduce both
operational but mostly market uncertainties, as described earlier. These risk mitigations
serve to protect the investor and reduce the sellers’ capital costs. As we gain moreexperience in modeling the behavior of these assets, the uncertainties may decrease.
Despite these drawbacks, intangible asset securitization may very well hold the key to avault of unexplored, exciting, and extremely useful set of financial risk-mitigation
instruments. Securitization could serve as a financial risk-mitigation instrument by
allowing a company to transfer risks to investors who are more willing or able to bearthose risks. For example, by securitizing its patents, a company can essentially pass someof the development and market risk to investors willing to gamble on both the attributesof the company and on the potential future market for the products.
For investors, intangible assets might prove to be a means of diversification by providing
investment opportunities that are less correlated to market fluctuations than current
investment products. The specific nature of these securities allows investors to hedge
distinct risks in their investment portfolios by choosing a securitized asset class thatcounteracts unfavorable market movements in their holdings. Since they are a separate
entity, many assets held in special purpose entities (SPEs) claim protection that issuperior to whole business investments like stocks.

Intangible Asset Monetization – Athena Alliance51

Furthermore, since assets can be segregated, investors can combine the risks in a mannerthat they find most attractive, without regard for the rest of the enterprise and its
respective risks and investor concerns. For instance, an investor may feel that a drug
company holds patents in cancer research that offer promise above and beyond otherproduct lines. Likewise, investing in a specific set of patents could hedge against
operational risk in the form of new disruptive technologies. On the other hand, investingin a portfolio of patents can lower the risk. As Grant points out, bundling of assets would
reduce the bankruptcy risk.252 A carefully constructed patent portfolio might also provide
a hedge for issuers of infringement or other insurance protections.
Insurance
Insurance is another long-standing method of handling risk, especially event risk. As
mentioned earlier, insurance is often a key component of the credit enhancement portionof a securitization deal. Such insurance packages protect against default and guarantee atleast some portion of repayment of the investment.
But insurance is also important for protecting the underlying intangible asset. A numberof companies offer various forms of insurance products, such as Intellectual Property
Insurance Services, Samian Underwriters, Marsh, and the Kiln Group.253
Third-party insurance, in the form of protection against infringement lawsuits, isprobably the most commonly thought of insurance product. This insurance can coverboth costs of a legal defense against an infringement claim and of any damage award or
settlement that might occur. It can also cover the cost of any design-around and even thenegative impact on company share price. More common in Europe than in the U.S., suchinsurance can be a key factor in protecting companies in the current climate of patent
litigation.254
First-party insurance covers the risks of ownership, such as the costs to correct any errors
in the patent or to cover the failure to include all inventors/claimants, and expenses due toany previous encumbrances on a patent. Insurance can also cover the cost of bringing an
enforcement action, including the litigation costs.
First-party insurance can be very flexible in the how it protects the underlying intangible
asset. For example, insurance can be purchased to backstop “representations andwarranties” made about an intangible assets as part of a sales agreement or merger or
acquisition, such as Samian’s RepSure product.255 In some case, this type ofindemnification can include holding the buyer harmless for any possible infringement
liability.
In a form of business disruption or continuity insurance, policies can be written to protect
against a key piece of intellectual property being found invalid, covering the loss of valueof the asset or loss of revenue from licensing. They can protect against any government
actions that could reduce the value of the intellectual property—a very important factor inIntangible Asset Monetization – Athena Alliance52

the life-sciences industries, which rely on government approvals. A variation of this value
insurance protects from loss of revenue due to damage to a company’s reputation.256
Likewise, variations of contract law insurance can be used to cover issues concerning
intellectual property, such as Kiln’s Open Source Compliance Insurance to protect
against liability from noncompliance with open source licenses.257 Some IP protection is
also available through general business liability insurance, such as Chubb’s coverage for
information and communications technology companies. 258
Key to any such insurance, as Hyden and Hogg point out, is the ability to assess thevalidity and value of those assets as well as the risks.259 Gauging the true risk level can bedifficult, as most patent litigation is settled privately. As we will see, the problem ofvaluation is not necessarily a straightforward proposition.
Valuation
All of these factors feed into the ultimate goal of delivering an accurate means of asset
valuation. However, financial markets are far from achieving consensus on how to value
intangible assets. For example, Wilhelm and Finnegan note the need for an “accurate,
standardized method to value intangible assets.”260
Affixing an accurate value to an intangible asset is essential for it to be used as loan
collateral or for securitization. It is also important, but less so, for sale and licensing since
the value of the asset may be tied to the specific use by the buyer/licensee. Independent
appraisals of value and useful life of assets should support this requirement.
As already noted, bankers will often over-collateralize their loans so that value
assessments may be conservatively discounted to cover the needed credit support.
Furthermore, many lenders and rating agencies use a Monte Carlo method or other such
sophisticated simulation of possible default outcomes to determine their potential default
risk exposure. The resulting output of such a simulation may overestimate the true risk
exposure of the transaction, which may cause credit enhancement needs to rise. Thus,
better valuations will help investors more accurately understand the risk and returns
involved with the asset. In turn, firms employing intangible assets as loan collateral will
avoid the current situation where value limits can hamper the ability to adequately
leverage the assets.
One should recognize that tried-and-true valuation models are likely to be the mostpersuasive for investors and financiers. There are a number of techniques andmethodologies in use for valuing intangible assets at both the micro- and macroeconomic
level.261
For firm-based analyses, there are three generally accepted methods of valuation: themarket approach, the cost approach, and the income approach.262 The market approach
looks for comparable market transactions. The cost approach works on either historicalcost (possibly with an appropriate depreciation rate) or current costs to either reproduce

Intangible Asset Monetization – Athena Alliance53(exactly duplicate) or to replace (create a functional equivalent of) the asset. The income
approach looks at what income would be gained from having the assets use a relief fromroyalty methods, which looks at how much a company would have to pay in royalty andlicensing fees to use the IP, or a “Multi Period Excess Earnings Method,” which attempts
to separate out the cash flows due to the intangible assets from overall cash flows.
Each method has its limitations. The market approach needs comparable transactions,which can be problematic to come by in thin markets. The cost approach must figure in
depreciation/obsolescence and does not always count all intangible inputs, such as
managerial efforts and workers’ skills. As Halligan and Weyand explain:
The direct acquisition cost of intellectual property may be insignificant, as when
the intellectual property results from a flash of insight. However, that same insight
may result from the sudden emergence of an idea after years of study in the field
and years of experimentation in the laboratory. Which then is the true cost, thenegligible cost of a moment’s insight of the sum total cost of the education andexperience of a lifetime? Similarly, replacement cost is problematic. How does
one replace a flash of insight?263
If there already is a royalty income stream, the income approach can be the moststraightforward. However, if one has to impute the income, then this method faces
imprecise assumptions about royalty rates and rates of return on various assets.
The licensing and sale of the asset can use any of the three methods. One of the mostrefined areas is that of patent analysis and valuation. There are a number of patent
analytics companies, including OceanTomo, 1790 Analytics, The Patent Board, M-CAM
and Patent Café.
But some remain skeptical about this. Sullivan and McLean argue that a single precise
valuation of intangibles may be next to impossible because so much of the value iscontext-specific.264
Outside factors may also change the calculation. “The KSR decision alone could
dramatically affect patent value across the board,” says Paul, Hastings, Janofsky &Walker IP litigation partner Michael Bednarek, referring to the then-pending U.S.
Supreme Court decision on patent obviousness in KSR International Co. v. Teleflex,
Inc.265 However, as Crouch points out, the final impact of the KSR case will depend on
how the Court of Appeals for the Federal Circuit interprets the case.266
Yet valuation companies have been receiving more business from mergers andacquisitions as buyers attempt to determine a reasonable value for a company, including
its intangible assets.267
In the case of collateralization and securitization, investors are particularly interested in
maximizing the likelihood of repayment and minimizing default (e.g., having to takeownership of the underlying asset). Thus, for these purposes, any intangible asset that canuse steady and predictable historical cash flows to project future cash-flow streams has aIntangible Asset Monetization – Athena Alliance54

distinct advantage over other like assets. Capricious cash-flow histories or ones with
dubious promise for predictable future returns will find it exceedingly more difficult tofind a convincing present value.
That does not mean that other forms of valuation are not used for collateralization. As
mentioned earlier, banks lend against only a fraction of the value of an intangible asset
and the assets are generally used as a backstop or as secondary collateral to make the deal
fly. In these cases, cash flow associated with the specific asset is not the determining
factor but the debt-servicing ability of the entire entity.
While marketable assets, including patents, and cash-flow generating intangibles, such as
trademarks and licensed technologies, may receive universal valuation acceptancethrough traditional valuation techniques, intangibles like workforce talents or customer
relationships find a myriad of dissident perspectives on their true value. Without
distinctive cash flows directly correlated to most intangibles, discounted cash-flowvaluation tools will not work. Without obvious comparable assets for most intangibles,
comparable analysis also fails to offer insight. Can productivity, for instance, becompared across companies? Perhaps, but too many variables exist between compared
entities to be accurate. Inkpen and Madhok argue that the nature of knowledge as
contextual and tacit makes valuation especially difficult.268 Since different parties canoften use knowledge in different ways, variations in valuation will result.269 Furthermore,qualitative value techniques are simply too subjective for financial markets.
This problem of valuation by both management and capital markets as a whole severely
undermines attempts to create financial leverage for these assets. However, to ignore
these factors is shortsighted for firm viability and long-term sustainability. Just because
nonquantifiable metrics are difficult to measure accurately does not mean that theycannot be harnessed for their recognizable contributions. Corporate valuation must focus
beyond the balance sheet.
Still, since segregation and correlation of contributed value for each intangible asset
proves to be both problematic and pervasive, the well-known disparity between book andmarket value may be unavoidable and quite possibly be wholly acceptable for the equity
markets. It acts as speculative territory for investor opinion denoting both competitive
differentiation and opportunistic arbitrage.

Markets and Liquidity
Certainly, a critical concern for intangible asset monetization is the lack of a pervasive
market for these assets, especially for uniquely creative intangible asset classes.
Some forms of markets currently exist for certain types of intangible assets. Book andsong rights are regularly bought and sold. As mentioned earlier, there are emerging new
mechanisms for the sale of patents. However, these are relatively shallow markets, andmany intangible assets have no market at all. The scope and reach of these markets arewholly insufficient to support the potential needs of this asset class.

Intangible Asset Monetization – Athena Alliance55

This limitation hampers widespread and real-time acceptance of intangible-leveraged
financial products from capital markets and causes the cost of funds to rise on potential
offerings. Without the government support—similar to that received by the earlysecondary mortgage market—the intangible asset securities market will need to engage
its market with attractive returns on investment and controlled risk profiles.
Furthermore, market asset value depends on continuously sufficient markets for resale. In
the absence of liquidity, assets lose their perceived value to the buyer. As businesses
expand and contract to meet market needs and investor expectations, they prefer assetsthat can be resold if necessary without taking significant discounts to do so. Yet one
could argue that an investor able to hold intangible asset-backed paper might be in an
ideal position to realize an arbitrage opportunity. Low market prices could reward
investors who can wait for an asset to emerge as a cash-flow generator and thus develop
into a more marketable asset.
The existence of a guarantee on the primary asset helps not only liquidity but also enables
a more acceptable the cost of capital:
The need for credit enhancement further differentiates ABS [asset-backed
securities] from MBS [mortgage-backed securities]. Most first mortgages areguaranteed—either explicitly or implicitly—by the U.S. government through thenational mortgage agencies, such as Fannie Mae, Ginnie Mae, and Freddie Mac,
which buy mortgages from local lenders and securitize them. As a result, MBSbacked by the agencies generally do not depend on the same forms of credit
enhancement that ABS do.270
Hedge funds already have mechanisms for dealing with illiquid assets using “sidepocket” accounts separate from their main accounts. These accounts pay out toshareholders of record when the account was created but not to future shareholders, who
also do not incur fees.271 Hedge funds are now controversial because some say they areused to hide poor performance by essentially taking bad investments off the books.272
As a result, regulators are beginning to look more carefully at how to deal with thevaluation of these illiquid assets. Intangibles are not the only assets where valuation
issues arise. Other illiquid assets, such hold-to-maturity loans, also use a variety ofvaluation techniques to assess fair value.273
The pressure for these fair value assessments is growing. For example, under a new
FASB regulation, companies will soon be able to use fair value for assets—consistent
with how buyers and sellers would use the market, cost, or income approaches.274 Banks
have already been given official guidance on how to use fair value in accordance with
Basel standards.275 As such valuation techniques are applied routinely to a number ofdifferent assets, their acceptance for valuation of intangibles should increase as well.276
Moving forward, there will be opportunities to look at new ways of dealing withintangible assets that are not yet liquid (as opposed to assets that have become illiquidbecause of bad performance).

Intangible Asset Monetization – Athena Alliance56

Cost of CapitalIndeed, the greatest obstacle to intangible asset monetization may be the cost of thecapital supporting it, especially for collateralization and securitization. Currently, there isa tradeoff between the complexity and the amount raised. According to Walsh, bank debt
and second lien loans are generally in the range of $2 million to $50 million while
securitization deals have a higher level of complexity but raise between $20 million and$1 billion.277
Leung and others have argued that the transaction costs of complex securitization deals
may simply be too great to produce any offsetting net benefits.278 Borod and Cassidy add
that—many large pharmaceutical companies have credit ratings sufficient to permit
them to borrow on terms as advantageous as they would obtain by securitizing
their intellectual property assets. At the other end of the spectrum, smaller
companies, although possessing valuable intellectual property, may not haveenough assets for a transaction sufficiently large to justify the fixed costs ofstructuring the transaction and obtaining a rating.279
These unique capital structures require higher costs to monetize. Without a standardized
model for structuring and valuation, intangible assets are difficult to assess effectively.
Consequently, these assets will require higher prices to monetize and greater
enhancements to cover the investor risk exposures, either actual or perceived. Since nosecondary market exists for many intangible asset offerings, investors are distrustful of
their associated unpredictability and lack of overt pricing information and often overpricetheir capital to support this uncertainty.
The situation may be improving as direct markets for intangible assets, specificallypatents, continue to develop. As price information is revealed through an increasing
number of public deals, comparables emerge and the uncertainty declines.
However, the current situation is still ambiguous. Due to the lack of clearly defined
intangible asset behaviors, loan providers tend to overestimate the risk of default of
securities and loans collateralized by intangible assets. To account for this associated risk,bankers offer loans only with high discount rates on the underlying assets andunderestimate the potential cash flows generated by them. The cost of capital rises andthe ability to leverage intangibles diminishes, reducing the opportunities to obtain capital
to finance new investments. In the long run, this distortion in the capital markets slows
economic growth and erodes investor confidence in the new market economy.
As a result, the cost of capital to monetize intangible assets may make their use
prohibitive. Any cheaper capital resource will be more attractive to the firm. Potential
projects may not meet their hurdle rate when the costs associated with funding them are
too high to go forward. Firms that do choose to monetize may draw enhanced scrutiny
from market analysts and bankers who question the use of such highly priced capital,
putting the firm’s overall risk profile under pressure.

Intangible Asset Monetization – Athena Alliance

57

Pressure may also come from market reactions (or overreaction) to the securitization
process as a whole. The recent concerns over subprime mortgages and collateralized loan
obligations (CLOs) may cause the market to require higher returns for these securitized
instruments than in the past.280
However, as Rosenberg and Rozier-Boyd note:
Securitization is an outstanding alternative for companies with weaker credit
ratings or fewer assets for collateral as bank loans. It also enables the owner of IP
assets of any type to monetize these assets and shift the risk associatedtherewith.281
On the other hand, if assets are available for collateralization, Bergelt and Meintzer argue
that this may be a better option for small and medium-sized companies, due to thecomplexities of securitization.282
Intangible asset securitization is far from a financial market commodity. Borod andCassidy lay out some of the problems with securitization:
One factor is the relative complexity of such assets as compared to receivables
assets and other financial assets. Another factor is the lack of awareness of someof the holders of these assets of the benefits of securitization. A third factor is thatthe holders of large pools of these assets have access to alternative sources offinancing, which are more favorable than or as favorable as securitization. A
fourth factor is the disappointing results of some early copyright, patent, andtrademark royalty transactions, which have been well publicised.283
The uniqueness of the asset classes and the structural complexity contained in the deals
work to undermine their usefulness to many firms. As Borod and Cassidy again point out:
The uniqueness of IP assets is largely attributable to two factors. First, the assets
are quite literally unique or sui generis, lacking the relative uniformity oftransaction terms and documentation that has been developed in the mortgage andconsumer finance industries. Each license of patent technology or a copyright orother IP asset is in effect a one-off transaction between the licensor and licensee.
Second, licenses of intellectual property assets and the related royalty cash flows
are analysed as future flow transactions, or transactions in which the royalties orother payment obligations are, unlike the fixed nature of the payment obligations
under mortgages or consumer receivables, contingent upon sales of the related
product or other measures of the commercialisation of the IP assets.284
The hope has been that as there are more deals, securitization of intangibles will be
become more standardized.285 But currently any company with the ability to raise capitalfrom more recognizable resources will likely do so.
There is also the decision of whether to tap the capital markets in the first place. Whilelicensing and sale of intangible assets have their own difficulties, they are much morestraightforward. Collateralization and securitization may be able to raise only a portion ofIntangible Asset Monetization – Athena Alliance58

the value of the asset. In an era of high liquidity and, until very recently, the low cost ofcapital, collateralization and securitization may be the best options. However, in a time ofhigh cost of capital and low liquidity, licensing and direct sale of intangible assets may
prove to be a preferred alternative.

Intangible Asset Monetization – Athena Alliance

59

Obstacles and Policy Proposals
If our goal is the creation of an open, transparent, fair, and efficient capital market for
intangible assets, an active role by government and independent regulatory bodies isrequired. A symposium in October 2006 convened by the Intangible Asset FinanceSociety identified risk management as the key to further growth of intangibles as an asset
class.286 The society’s proposals included the need for international standards/bestpractices for intellectual asset management and a consistent valuation metric.
Furthermore, they noted that until these assets can be pooled to better diversify the risk,
investors will be reluctant to embrace this investment.
Workable capital markets are fueled by consistent, accurate, and useable informationnecessary for practical insight into corporate operations and valuation as a whole.
However, investors and creditors are increasingly forced to make decisions in the dark as
intangibles play an ever more important role in American businesses while the means ofunderstanding the nature and behavior of these assets fail to keep pace. The risk of nothaving an accurate insight of intangible holdings makes for hesitant financial activity andlimits the availability of capital necessary for American enterprises to innovate, grow,and sustain themselves.
Actions are needed to structure the market and provide the appropriate regulatory andoperational infrastructure. Other steps may also be needed to provide incentives, or at thevery least, to remove disincentives and to increase participation in that market.
This section reformulates the points raised in the previous sections into three sets of
obstacles to monetization of intangibles. We then propose a basket of policy ideas toimprove or correct these impediments. As we will see, the obstacles—and the specificpolicy steps to resolve them—are highly related. More than one policy solution may beneeded to address any one particular barrier. In addition, these obstacles and policies areboth distinct and overlapping when it comes to the two levels of monetization: creation of
direct revenues through sale or licensing of intangible assets and the use of intangibles asassets for collateralization or securitization.

Obstacles
According to Roth, markets need to overcome the following three operational failures:
1. Failure to provide thickness; that is, to bring together enough buyers and sellers(or firms and workers, schools and students, and so forth) to transact with eachother.
2. Failure to overcome the congestion that thickness can bring, that is, that can
result when lots of buyers and sellers are trying to transact. That is, failure toprovide enough time, or failure to make transactions fast enough so that market
participants can consider enough alternative possible transactions to arrive atsatisfactory ones.
3. Failure to make it safe for market participants to reliably reveal or otherwise
act on their information.287

Intangible Asset Monetization – Athena Alliance60

In terms of creating an intangibles market, safety and congestion issues can be seen as
stemming from the lack of information and problems in market structures. The issue of
thickness involves the problem of the supply of intangibles to the market. This section
will look at the issues of these three areas: inadequate information, imperfect market
structures (and its numerous subcomponents), and insufficient supply.
Inadequate Information: reporting, measurement, and valuation
Perhaps the greatest obstacle for intangibles centers on the absolute vagueness associatedwith identifying, measuring, and quantifying these assets. Existing reporting requirements
have a blind spot when it comes to showing the actual value of firms because intangibles
have not been sufficiently or accurately integrated into financial reports and accounting
regulations.288 Only intangible assets acquired externally appear on balance sheets. Most
are completely invisible, making their true value unidentifiable outside of theorganization itself. Financial statement footnotes are oblique, subjective, and wholly
incomplete for an accurate assessment of intangible asset worth. Bruce H. Nearon,
writing in The CPA Journal, notes that “with few exceptions, we account for intangible
assets in the same manner as we did 30 years ago.”289 The result is both equity and debt
markets operating with only limited information on companies’ most important assets.
As noted earlier in this paper, intangibles are difficult to segregate, correlate, andcompare. Their valuation, when attempted, can often be subjective, erroneous, and/or
incomplete. Furthermore, very little research material exists from either public or private
studies that clearly defines the asset class. Most financial professionals have only apassing knowledge of the topic.
As a result, according to Henning:
Most companies do not gather information about the IP internally that would lend
itself to the external disclosure to the investment community. Neither do they
have IP-related information available. And still more: they do not have themeasures and metrics that might provide some clue to management or outsiders as
to the value that they possess.290
Even with a better understanding, the lack of market information necessarily leads tousing models to create approximations on both price and risks. The recent problems inthe subprime mortgage market demonstrate that complex financial models do not always
correctly capture risk. Nor are they necessarily good substitutes for actual market pricing.
Because currently practiced valuation metrics on these assets can be subjective andorganization-specific, no clear industry-wide comparable measure standard is available.
As previously noted, direct revenue-generating intangibles can be slotted into traditional
valuation models, but most intangibles fail to provide obvious correlations to revenues
despite overt contributions to bottom-line success. To complicate matters even more,
usable valuation models can find severe discrepancies in risk assessment. Discount rates
and terminal valuation determinations for intangibles tend to be altered to capture theperceived risk of the assets—risk resulting from a misunderstanding of the assets.

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Consequently, capital markets tend to look at intangibles with hesitancy, unsure of how
to assess their behavior, worth, and contribution.
Imperfect Market Structure
Financial and credit markets depend on distinct ownership, transfer rules, and legal
definitions to give the creditor the ability to liquidate the asset if necessary to recoup aloan or investment supported by the asset. Some intangibles, as noted earlier, cannot betransferred due to their oblique characteristics. Others, especially IP assets, can serve as
excellent resources for collateral on loans, securities, and other capital allocations.
However, the usefulness of these assets could be undermined by weak asset ownershipenforcement from regulatory bodies, cloudy ownership boundaries, ease of proprietaryinfringement, and inadequate transference protection.
Perfection and Priority Claims
For a market to work, especially a credit market, it is vital that both ownership andfinancial claims on that ownership be known. As noted earlier, intangible assets,
specifically intellectual property—with patents as the case in point—suffer from a
confusing system of perfection. Legal claims are currently covered by state, not federal,
laws, causing geographic variability in court decisions that could be problematic for
securitization.
Ownership rights’ perfection requires filing a UCC–1 financing statement with a state
office. In the case of intangibles, even determining the correct filing jurisdiction can beproblematic. No central registry of claims exists, which is contrary to best practices. As
the OECD framework for investment outlines:
A good legal framework should support the use of all kinds of assets and rights as
collateral, while as far as possible eliminating formal requirements to create
collateral and should foster transparency and predictability for commercial
transactions. The legal framework should also be supported by publicly open,
affordable and efficient registry systems. Well functioning registry systems are
critical tools in the development of financial intermediation and help to boost
investment activity.291
In addition, the process of securitization accentuates the problem. Securitization’s use ofSPEs allows entities to segregate certain assets from all other operations by transferring
ownership rights of these assets to an independent third party. This results in distinct
ownership separation that shields the assets from the creditor or legal claims of theenterprise as a whole. As such, it can create one more layer of separation between theasset and those with a financial claim. This can be a negative as well as a positive feature.
Even in real estate, banks that own pools of mortgage-backed securities can have trouble
proving ownership to start foreclosure proceedings.292
While the SPE is a common vehicle for various transactions, its association withunscrupulous financial maneuverings in organizations like Enron has tainted the concept.

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The problem may be more of perception than reality. Various regulatory actions havebeen taken to prevent future abuse.293 However, both lingering and new concerns may
open the door for possible legislative and legal movements that may erode the absolute
separation of ownership claims in the asset transfer to the SPE. The use of SPEs by banks
and hedge funds as conduit structures is under increased scrutiny as a result of the recent
problems in the subprime mortgage market.294 These questions focus on whether suchoff-balance-sheet funding structures hide credit system strains.
Since these transfers are generally off balance sheets, their use is being scrutinized byskeptical overseers who have already shown a proclivity to erode the priority claims.
Without an impregnable ownership claim, the assets supporting the security could be
pulled away from creditors who are secured by the asset. Without the absolute certainty
in priority ownership claims, the risk, and thus the pricing of the security, rises
substantially. Many securitizations might simply not be practical or at the very least
financially palatable as a result.
Ownership and Risk
Currently, the most easily identifiable and monetized intangible assets are patents. The
patent system, however, appears to be beset by what some consider an ineffectual
scheme. Critics claim that the U.S. PTO is overburdened, slow, mistake-prone, andincapable of proper identification of duplicitous claims. As proprietary claims come into
question, so does the implicit value of the asset itself. A claim without legal protection
and clear ownership boundaries makes for poor financial collateral. A study by IP
consultants M-CAM cites that more than 30 percent of issued patents have duplicate
claims on them.295
Such duplicative patents, along with overly broad claims, lead to costly legal battles andincreased uncertainty.296 The costs of fighting infringement can easily outweigh the valueof the proprietary advantage. Many IP assets must be valued with an extra discount factor
that takes into account the costs of litigation. As Hall notes:
The issue of a large number of low-quality patents will increase uncertainty
among investors concerning the level of protection enjoyed by these related
inventions, which in turn will make it more costly and difficult for investors tobuild on these related inventions in their own technological advances.297
The issue with copyrights is somewhat different. There is usually no question ofownership, although the owner may be sometimes difficult to locate, especially in cases
involving derivative works. Because of the wide scope of copyright protection, follow-on
works or works that use a portion of a copyrighted work must seek clearance—or run therisk of an infringement action. The problem is complicated by so-called orphan
copyrights mentioned earlier, when the owner may be difficult or impossible to locate but
infringement penalties can still apply.298 Thus copyright investors must take care to seethat a work does not have hidden liabilities.

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In the case of trade secrets, ownership can be even more problematic. Often confusedwith ownership, trade secrets are essentially know-how that may be either formal(written), tacit, or a combination of both. Simply identifying what a trade secret is can bedifficult enough, let alone attempting to value that trade secret. The key know-how that
constitutes the trade secret is often bundled with other forms of intellectual property, suchas patents. Defining who owns that know-how, especially when it is tacit, can be a matterof dispute. Does it belong to the organization or to the specific individual? Often that
determination is decided by contract and employment law. In some cases, theorganization retains all rights; in other cases, rights are retained by the individual who
created/discovered that knowledge.299
Even when the right to use the trade secret is not in dispute, the exclusivity of that right is
not guaranteed. Knowledge is a non-rival good, meaning that it can be possessed by morethan one individual/organization at a time. Exclusivity must be enforced through legalmeans, often through a breach-of-contract suit. As discussed in the earlier section on
trade secrets, it’s not a trade secret until the court says it is.
——
In real estate, ownership uncertainty is reduced through clear title registration processes
and surveyors’ plats. That is the role of the intellectual property system. Any lingering
uncertainty is handled through title insurance. Similarly, as discussed earlier, intellectual
property insurance is available, including insurance to cover the validity of a patent.
But patent insurance may come with a price that makes it essentially unavailable. In thecase of third-party infringement insurance, a recent study for the European Commission
concluded that “in no part of the world has Patent Litigation Insurance (PLI) been
particularly successful.”300 That finding is not shared by all. But enforcement andlitigation insurance can suffer from the fatal flaw of becoming a funding mechanism:companies simply buy the insurance knowing that they are either the likely target of an
enforcement action or are planning on starting an infringement case against someone
else. Premiums goes in and claims go right back out.
In the U.S., companies that underwrote liability insurance in the 1990s were badly burned
with loss ratios of 4000 percent to 6000 percent.301 Companies such as Samian andIntellectual Property Insurance Services are once again underwriting patent liability in the
United States. However, there is some concern that the size of the policies can cover theactual costs, especially given the U.S. contingency fee system.
More akin to homeowners’ insurance than title insurance, first-party insurance
approaches the issue of ownership the other way: protecting what you have.
In the case of trade secret insurance, it is more a form of employment practices liability
insurance because the key feature is protection from employees’ divulging the secret
information. As such underwriting the risk entails looking at a company’s policies andprocedures related to training of its employees, vendors, and consultants on what theIntangible Asset Monetization – Athena Alliance64

trade secrets are and on which information the company considers to be trade-secretprotected.302
Like any insurance, the issue for all IP protection is recognizing the risk and setting theappropriate price for the transfer of that risk. Finding that balance is difficult. Vance
argues that companies don’t buy this type of insurance because there is no real transfer ofrisk:
The only policies that exist are dollar for dollar, meaning that the insured pays forthe loss at the end of the day. There is a feeling that if risk transfer was offered,people would not protect their IP. Some felt the same way about employment
practices coverage before it was offered.303
In other words, insurance companies are afraid they cannot effectively manage orquantify the risk and companies do not think they are buying any real protection.
Treatment of Intangibles in Existing Rules and Regulations
Recent policy changes have started improving the regulatory framework for governing
intangible assets. The implementation of SFAS 141 and 142 expanded SEC
classifications and guidance on MD&A statements, and Sarbanes–Oxley reforms have all
worked to better define assets and how they should be classified. However, as noted
earlier, the regulations on disclosure and reporting do not go far enough.
And regulations do not necessarily encompass intangibles. For example, the SEC defines
the asset classes that can be used for asset-backed securitization as a “discrete pool ofself-liquidating financial assets.”304 The seemingly inclusive definition fails to recognize
assets where no readily apparent secondary market exists. Any intangible asset without aclear market may not be included. This could present two concerns for intangible assets
in securities markets: the lack of recognizable definitions of intangible asset classes bymarket regulatory entities, and the insufficiency of these entities to capture material
information on intangible components of securitizations for investors.
Regulations may also not be cognizant of intangibles. As mentioned earlier, Sarbanes–
Oxley requires increased disclosure. Since intangibles can account for a significant oreven a majority amount of the value of a company, their accurate disclosure seems
essential for compliance with the act. Sarbanes–Oxley, however, has yet to clearly
incorporate or enforce compliance on intangible asset disclosure. It is simply silent on alarge portion of company value.
Transaction Costs (Due to Uniqueness of the Deal)
The purpose of monetization is to raise funds, either through revenues in the case of saleand licensing or through investment capital in the case of collateralization andsecuritization. To the extent that funds are available through other mechanisms at lower
costs, the incentive for monetization disappears. Thus, the higher the transaction costs,
the less the incentive. This is true in all forms of monetization. If the cost of patenting a

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technology and/or the costs of licensing that knowledge is high, there is less reason to doit.
There are ways to overcome high transaction costs. For example, Haller and Palim argue
that a patent pool is one way of lowering some of the transaction costs:
Rather than pursuing enforcement and licensing on its own, a patent pool provides
a mechanism for sharing those costs and risks. This is particularly attractive tosmaller patent holders for whom such licensing and enforcement costs mightotherwise be prohibitive.305
In the case of collateralization and especially securitization, another set of transaction
costs arises due to the complex structure of the deals. For the most part, the securitization
deals discussed earlier have been one-off deals. While there is a general framework for
asset-backed securities, there is little standardization in the case of intangible asset deals.
Each deal has to have its own specific structure to make the deal work—thereby raisingtransaction costs.
Securitization faces yet another hurtle. The purpose of securitization is to increaseliquidity. Assets that are not easily traded, such as individual mortgages, are bundled
together into a recognizably traded financial instrument. However, as the subprime
mortgage market problems have revealed, liquidity in a financial instrument can quickly
disappear, especially if there are doubts as to the value of the underlying asset. The lackof liquidity, or at least the potential uncertainty over liquidity, also raises the transaction
cost by requiring higher assurances and covenants and increasing the cost of capital.
As Roubini notes:
Some specific ideas on how to make new complex and exotic financial
instruments more liquid and easier to price would be to make such instrument
more standardized and have them traded in clearing house-based exchanges rather
than over the counter. The benefits of standardization are clear as suchstandardization would allow to compare securities with similar characteristics andwould thus improve their liquidity. Moreover, instruments that are exchangetraded through a clearing house would have much lower counterparty risk, would
be subject to appropriate margin requirements and would be appropriately
marked-to-market on a daily basis.306
Insufficient Supply
As mentioned earlier, markets need both thickness and lack of congestion. The
congestion problem is in part answered by the structure of the market, as discussed in thesection above. The issue of thickness is a matter of incentives for supply.
Prudent corporate strategy should account for the intangibles it owns. Assets such as
patents, trademarks, copyrights, and processes may contain enormous profit potential.
Microsoft, which filed as many as 3,000 patents in 2004 alone, credited this innovative
thrust for expanding its workforce by 12 percent.307 The attributes and opportunities ofIntangible Asset Monetization – Athena Alliance66

these assets should be carefully reviewed to unearth the profit possibilities. Many
industry experts believe that intangibles are significantly overlooked by organizations,much to the detriment of their bottom line. In addition, holding un- or underutilized
intangibles can needlessly cost an organization a significant amount of money.
Proprietary rights, for instance, have to be licensed, cataloged, and protected. Dow
Chemical saved up to $40 million a year in maintenance fees alone by reducing its
portfolio of unutilized patents.308
Still, while many firms may be sitting on veritable goldmines of unutilized orunderutilized intangibles like inactive patents, few may have the internal means orunderstanding to turn them into revenue-generating assets. Regardless of the profit
possibilities, companies simply do not have enough incentive to account for and disclose
their intangible assets. Measurement is costly, subjective, and difficult. Many intangibles
are tightly interrelated and hard to correlate across business units and profit centers.
Furthermore, there exists no overt tax advantage or financial inducement for disclosing
intangibles, and many organizers are justifiably fearful of opening their innovative vaults
to the eyes of competitors. Because companies are not required to disclose theirintangible assets publicly, few, if any, do so.
While recent legislation reforms like Sarbanes–Oxley’s Section 404 have begun to push
for the disclosure of certain intangibles in financial reports, many firms still guard
information on their intangibles as strategic information. The general thinking has beenthat disclosing the content of assets like R&D is akin to revealing the future direction andobjectives of the company. Such information, they claim, makes proprietary
developments vulnerable to replication, while also tipping one’s hand on strategic
initiatives before the company is ready to go to market.
The culture of defensive patenting feeds into this ethos of keeping information on
intangible assets close. There appears to be an enduring perception that intellectual
property should remain locked up.309 As Phelps explains, “management is blinded by two
false assumptions: that patents effectively deter infringement and licensing patents
somehow undermines a company’s competitive edge by removing barriers tocompetition.”310 The result is a perception of patents that McCurdy likens to the nuclear
arms race, with each side trying to horde an ever-growing number of defensive patents.311
There is some rationale for defensive patents. Detkin classifies patents as need-to-havecore patents, good-to-have patents in the company’s area of expertise, and unrelated
patents. But he argues that 50 percent of a typical IT company’s patent portfolio is
nothing but unrelated overhead patents. Good-to-have patents are worth licensing andunrelated patents should be sold off.312

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Policies
Any discussion of policies in an area such as the monetization of intangibles must at least
acknowledge the broader issues of innovation and economic competitiveness. Areas suchas macroeconomics, education, worker training, R&D funding, and entrepreneurship lay
the groundwork for the creation and utilization of intangible assets.313 Innovation is, inpart, predicated on these policies. However, other areas of policy, such as technology
transfer, intellectual property rights, taxation, etc., directly impact the monetization
process.
Each section below starts with a set of possible policy actions (the full list is compiled inAppendix C).
It is beyond the scope of this review to present an exhaustive list, and definitive analysis,of every possible policy option. Our goal, rather, is to outline potential areas for action.
The purpose is to provide an agenda for ongoing policy work—and especially to raiseawareness of how and why intangibles should be considered as part of current actions andreviews as market participants and government agencies work through the current
financial issues.
Some of the policy recommendations are ready for execution. Others are presented tohighlight the need for additional investigation. Some may provoke agreement in principle
but disagreement on specifics. Others are presented to stimulate debate and discussion.
All are included to provide an understanding of the range and scope of issues that need tobe addressed to facilitate the monetization of intangibles. Ultimately, the policy actions
are aimed at three objectives: 1) make current owners, such as company managers, awarethat they have intangible assets of value that can be sold in the marketplace; 2) create
processes and mechanisms that simplify the transaction between buyers and sellers; and,3) create a comfort zone for buyers, so that they are willing to put up their money.
Identification and Disclosure
Policy Actions:• Reinstate the joint FASB and IASB research project on expanded disclosure
guidelines for intangibles• Review and revise SEC definitions of asset-backed securities to include intangible
asset classes as necessary• Clearly designate nonfinancial measures for evaluating intangibles in MD&A portionof financial statements• Create a safe harbor in financial statements for corporate reporting of intangible
assets• Modify Sarbanes–Oxley so that there is a clear directive for assessments of “material”
intangible assets

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•
•

68

Utilize the stock exchanges (and the proposed Intellectual Property Exchange in
Chicago) as initial testing grounds for increased intangible disclosure by requiring
listed members to make additional disclosures that capture intangible metrics
Create an intangibles reporting and valuation guideline association/group, similar to
the International Private Equity and Venture Capital Valuation Group and theEnhanced Business Reporting Consortium.

Identifying intangible assets is the basic starting point for any set of policies that will
facilitate the monetization of these assets. Issues related to both supply and demand of
intangible assets can be attributed to the problem of their invisibility.314 Addressing thisproblem will require changes in both accounting and financial disclosure regulations.
The problem inherent to SFAS 141 and 142 is not in the rules themselves, but rather in
the incompleteness in accurate intangible valuation that the rules attempt to rectify. The
business combination is itself more clearly defined on the basis of acquired intangibles
and goodwill, but the overall valuation of enterprises, whether involving acquisitions or
not, has not been addressed. Since most intangible assets are created internally rather than
through acquisition, these accounting rules miss the bulk of the asset class in the financial
disclosures. The solution undoubtedly emerges from more accurate valuation standards
and pervasive implementation of accounting for intangibles.
Annual intangible asset appraisals based on FASB-defined valuation models, forinstance, could become a requirement of impairment disclosure as introduced by SFAS
142. All companies, regardless of their acquisition history, would need to determine anddisclose the value of their intangible assets to investors. The result would provide useful
insight to investors while also offering a more fair disclosure process to all organizations.
Instead of just capturing the costs and value transfers of business combinations, new allencompassing rules would detail the asset value increases and decreases of all business
entities.
Last year, FASB and IASB explored undertaking a joint research project to look at ways
to expand disclosure guidelines for intangibles, with IASB taking the lead in developing
the proposal. Unfortunately, at their December 2007 meetings, both IASB and FASB
decided to shelve this project, citing limited resources.315 IASB has at least expressed awish that research on the issue continue. However, both stated “the timing is
uncertain.”316
This decision is unfortunate, indeed. At a minimum, FASB and IASB should devote
adequate resources to research on the topic to bring our state of knowledge to a point
where guidelines can be issued.
——
The SEC is the other key player in the identification of intangible assets. Quite simply,
the SEC needs to more seriously consider the role of intangible factors in company
assessments. Its regulatory definitions should seek to expand the scope of its definition ofIntangible Asset Monetization – Athena Alliance69

intangible asset classes while clearly designating nonfinancial measures for evaluatingthem. Measures that help to portray accurate assessments of such factors as employee
turnover, time to market, and product development strategy would provide valuableguidance for investors across a given industry. Such benchmarks as employee relations
and customer satisfaction measures would make management evaluations more accurate,
pervasive, and useful. The SEC could signal to industries the specific measures it would
like to see when performing compliance reviews, thereby acknowledging thatmanagement should consider making such disclosures to ensure smooth reviews.
In opening up further disclosure, the SEC could create safe-harbor provisions for thedisclosure of certain non-GAAP information. In January 2003, the SEC, pursuant tosection 401(b) of Sarbanes–Oxley, adopted a new Regulation G on disclosure of nonGAAP financial information. These regulations require that any disclosure of non-GAAP
financial measures also present the most directly comparable GAAP financial measure
and reconcile the disclosed non-GAAP financial measure with the most directlycomparable GAAP financial measure.317 Sarbanes–Oxley also imposes severe penalties
for providing misleading or inaccurate information. This combination may substantiallylimit the disclosure of non-GAAP financial information.
There are good reasons to limit such information. The purpose of GAAP is to ensure thatthe assumptions and rules used to compile financial information are understood by all.
There is a real danger of non-GAAP information resulting in misleading financial
statements.
However, it has long been recognized that some financial information not covered by
GAAP can also be useful and relevant to investors. Changes may be necessary to givecompanies an incentive to provide that information. As recent white paper by the AICPA
Assurance Services Executive Committee notes:
In order for efforts to improve reporting and assurance to reach fruition, there is aneed for improved safe-harbor legislation to protect directors, managers, andauditors who make a good faith effort to provide more high quality, transparent
disclosures.318
Creating a safe harbor for reporting intangible assets was specifically recommended in
the 2001 Brookings Institution Task Force on Intangibles report, the 2001 Garten Task
Force report, and the 2004 National Innovation Initiative report.319
To provide further incentives for disclosure, the Sarbanes–Oxley Act could define a clear
directive for the disclosure of intangible assets considered “material.” As discussed
earlier in this paper, many feel that such disclosures are already required. Others, such as
Malackowski, have called for explicit inclusion of intangibles under Sarbanes–Oxley.320
Better disclosure should reduce the perceived risk of the enterprise, as Sarbanes–Oxley
ultimately seeks to achieve. The financial benefits of such disclosures have been noted, atleast anecdotally.321

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While encompassing all intangible assets in such compliance requirements may be too
difficult to implement at this time due to the lack of valuation standards for these assets,
the SEC should at least require the disclosure of intangibles as they relate to the financial
condition of the enterprise. As Henning points out, simply disclosing the existence ofintangible assets is not sufficient:
The disclosure of risks, to the extent that strategy or financial conditions may relyon patents with a short-term, finite life and [in] the absence of alternative sourcesof revenue, [is] not only sound business practice, but a critical part of the intent ofSarbanes–Oxley. These risks need to be disclosed. The risks associated withpatent validity (quality) today have become one of the enormous variables intoday’s competitive environment.322
The Brookings report recommends that a “separate part of the Form 10–K be earmarked
for disclosures that are specifically designated as experimental and inherently subject tomistakes and volatility.”323 For instance, companies in high-tech or innovation-driven
industries could logically be expected to detail the condition of their IP assets and to
make relative assessments of intangible investment performance based on industry
standards or historical company benchmarks. A pharmaceutical company would disclose
the value of its drug patents based on comparable asset amounts, management would
assess its R&D activities through speed of delivery-to-market benchmarks, andworkforce talent would be judged based on comparisons of credentials and staff size toprevious company markers. Such overt disclosures would enable more accurate insightfor investors and creditors alike while also promoting the above-the-board reputation ofcompany management.
——
Furthermore, systematic oversight bodies beyond government regulators could either be
established or expanded as mechanisms for facilitating disclosure of and accounting for
intangible assets. While the SEC and FASB would play a key role, other organizations
could also have important roles. For example, self-regulatory organizations (SRO) dictate
compliance standards for their members. In fact, the stock exchanges could serve as an
initial testing ground for increased intangible disclosure by requiring listed members tomake additional disclosures that capture intangible metrics. Ideally, a separate SRO entity
would work best, incorporating companies of all sizes and industries to generate usefulmetrics on intangible asset valuations and returns. The new Intellectual Property
Exchange could also play a role in this standard-setting process.
The accounting industry already has one model for creating a framework for nonfinancial
disclosure: the Enhanced Business Reporting Consortium (EBRC).324 EBRC is focusedon broad reporting issues, not intangibles specifically and not on valuation. But it does
provide a general reporting framework under which intangibles could easily fit.
Examples of other industry-based groups come from the private equity and venture
capital industries. Created by the Association Française des Investisseurs en Capital(AFIC), the British Venture Capital Association (BVCA), and the European Private

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Equity and Venture Capital Association (EVCA) in 2005, the International Private Equity
and Venture Capital Valuation Guidelines have been endorsed by a number of private
equity and venture capital associations from a number of countries.325 The U.S. Private
Equity Industry Guidelines Group (PEIGG) issues both valuation and reporting
guidelines.326
An independent entity could also promote intangible asset disclosure by objectively
gathering data for evaluating a firm’s value based on these assets. A number oforganizations already provide information on important metrics, which are not required
under GAAP, such as social responsibility and environmental sustainability. Fortune
magazine’s annual “Best Companies To Work For” survey tracks intangible value by
generating a useful scoring metric to showcase companies that have positive employee
relations, a critical intangible asset.
Another useful source for intangible asset disclosure could be industry-relatedorganizations. These powerful entities can demand that members track certain variables,
undergo stringent testing on these variables, and allow these metrics to be published.
Independent vehicle safety, resale, and customer satisfaction measures have prompted
auto companies to invest in such intangibles as safer products, increased product features,and innovation just to stay competitive.
The creation of independent entities and industry-related organizations to undertake thesetasks is an action that only industry can take. The federal government can play a limited
role in providing some form of official recognition of such activities, similar to the way
in which credit rating agencies are officially recognized.327
Valuation Standards
Policy Actions:• Convene a special FASB/SEC task force on valuation• Support and encourage increased research on valuation standards• Work with the International Standards Organization efforts to set brand and patentvaluation standards to ensure that relevant expertise and stakeholders are engaged.
It will likely be difficult to find a common set of metrics that captures and discloses all
the various investment risks of intangibles. The creation of valuation standards willprobably be even harder. As noted previously in this paper, many intangible assets likeenterprise-specific intangibles do not lend themselves to easy measurement because they
simply do not have the characteristics necessary for traditional valuation models.
Intangible assets that offer predictable cash flow and comparable market value do havesome attributes that allow for traditional modeling. But even then, many people feel thatthese intangibles are still too unpredictable to provide reliable valuations.
The further expansion of the monetization of intangible assets is highly dependent on amarket-wide acceptable standard for valuation. Without this, many investors andcreditors will choose not to place financial bets on them, or at least, they will only do soIntangible Asset Monetization – Athena Alliance72

at a hefty premium that may make the financing option too prohibitive to be useful. Thisis a familiar story for innovation in any industry, but this hurdle could provide profitable
opportunities for financiers once a consensus solution emerges.
Here again, the role of the policy entities, specifically the SEC, the FASB, and the IRS, iskey. There may be an opportunity for two of the key players—SEC and FASB—tojointly address part of this problem. Valuation is an issue for more than just intangibles.
The recent turmoil in the mortgage and ABS markets has raised important issues
concerning valuation in unstable (and sometimes frozen) markets. This has come to ahead over the implementation of new fair-value accounting standards. Recently, the SEC
has sent guidance letters to 30 CFO regarding the use of these new standards.328 The SEC
then posted a sample letter on their web site.329 The key requirement of this guidance
involves an explicit discussion of the methodology used to price assets as part of the
MD&A section of the company’s financial report. In other words, SEC is using the oldmath teacher approach of show-your-work: “don’t just give me a number, tell me how
you got there.”This way of handling valuation concerns could just as easily be applied to intangiblebacked lending and securitization. An SEC approved disclosure system for the valuationof currently hard-to-price assets would set a good precedent for all “exotic” asset classes.
In addition, forcing companies to discuss their valuation methodologies will foster agreater scrutiny and evaluation. That should lead to greater standardization of themethodologies and a more transparent (and less risky) way of deal with these assets.
But the SEC guidance is only the first step. To follow up, the SEC and FASB should
convene a joint task force on valuation to review the experiences of companies incomplying with the new SEC guidance—and to see what lessons might be learned forstandardization of a valuation methodology.
However, numerous other entities involved in both the primary and secondary markets,
such as exchanges, rating agencies, and large investors, also play a part. The process ofsetting valuation standards must bring all these players to the table.
In this regard, the greatest potential public policy contribution may be the encouragementof research on the topic. Independent organizations and investor groups could also fund
this research. One specific area where public policy support may be needed is in theapplication of intellectual property rights to such research. Under the current rules
allowing patenting of business processes, it is conceivable that valuation methodologies
could become proprietary business secrets rather than industry-wide standards. The
proprietary lock up of innovative valuation methods may convey a competitive advantage
to one particular organization, but it would also stifle the further market growth to thedetriment of all.
One of the more intriguing valuation ideas is to create a “market-enforced self
assessment.” Such mechanisms have been suggested since the medieval days for tax
assessment. Under this model, the merchant self-declares the value of his goods forIntangible Asset Monetization – Athena Alliance73

purposes of taxation, but the King reserves the right to buy the goods at that stated price.
In the case of patents, it would work as a substitute for a patent renewal fee:
1. Patent holders would be required to provide a self-assessed value for theirpatents. An annual Patent Property Tax [in lieu of the patent renewal fee]would be paid based on that value.
2. A marketplace for patent selling and buying would be established.
3. Upon paying an “earnest money” fee, a patent buyer could challenge the selfassessed value, quoting a higher value for the patent.
4. If the challenge value is accepted by the patent holder, then the patent holder
would pay the Patent Property Tax [PPT] on the new value.
5. If the challenge value is rejected by the patent holder, then the buyer isobligated to purchase the patent for the challenge value.
6. The patent buyer would also have to pay the PPT for the year in which it waspurchased.330
The creation of such markets must be done with care and must address the issues ofthickness, congestion, and safety as described earlier in this report. In addition, such selfassessing processes only work when there is both a market and an incentive, such as
taxation, to declare value. Only a few cases of intangible assets might meet thesecircumstances. Still, the idea should be explored further.
——
Another avenue for activities is the International Standard Organization (ISO). At theurging of the German Institute for Standardization, the ISO has launched a project onbrand valuation.331 The ISO is also looking at a project on patent valuation, again at theurging of the Germans.332 This work goes through the national standardization bodies.
The relevant body in the U.S. is the American National Standards Institute.333
The end result of these two projects will likely be a de facto standard for valuing
intangibles. They will have to confront all of the valuation challenges described in thispaper. To be successful, they will have to define a valuation methodology that overcomes
the weaknesses of the existing methods. Doing so will require a high level of expertiseand experience.
It will also require fully engaging the significant stakeholders, including the legal andaccounting professions. For example, the ISO must engage the experts at both FASB and
IASB, and build on the knowledge base already established. Done right, the ISO projects
can help build a strong foundation for an agreed upon valuation methodology. Donewrong, they risk adding to the confusion.

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Regularizing the Market
Policy Actions:• Explore the creation of an Intangibles Mortgage Corporation (Ida Mae) to regularize
the intangibles-backed securities market, either as a limited government-sponsoredenterprise (GSE) or as an independent organization• Review all security regulations to determine their applicability to intangibles• Review federal and state insurance laws and regulations to promote the developmentof financial sound insurance coverage of intangibles.
Markets for intangibles are developing at both the primary and secondary level. Primarymarkets involving the sale and licensing of intangibles are generally defined and follow a
regular process. Licensing operations are well established and new methods of asset
sales, such as the IP auctions, follow known paths. The secondary market of intangiblebacked securities is still in flux.
Intangible asset securities harness the attributes of previous asset-backed secondary
market offerings. The potential for structuring financial products that incorporate
intangible assets is limited only by the financiers who create them. These securities not
only offer significant rates of return, but they can also support distinct risk reduction forinvestors. However, as we have seen from the secondary market in subprime mortgages,
market enthusiasm for these securities may outrun market understanding of the risks andrewards. If intangible asset-backed securities are to become routine, further steps toregularize the market may be needed.
In part, dealing with the issues of identification and valuation discussed above will help.
However, as long as these deals remain essentially unique, one-off transactions, a broader
secondary market will not emerge.
The comparison with other asset-backed securities raises inevitable questions, pro andcon. The travails in the secondary mortgage market show both sides. While credit forparts of the market dried up, understood products known as “conforming loans” havegenerally withstood the credit liquidity problems. These products meet the specificstandards (hence the term “conforming”) and are guaranteed by one of housing GSEs,
Fannie Mae, Freddie Mac, or FHLBanks.334 Understanding both the standards andmechanisms that provide liquidity are important to this process.
The rise of other forms of asset-backed securities, such as auto loans and student loans,also show how markets can be created and standards set. The success of the Sallie Maeloan market may act as a model for the development of these markets.335 Sallie Mae loans
and student loans—or, put another way, loans secured by knowledge enhancement, in
itself an intangible asset—are bought and resold relatively easily in secondary markets.
There may also be an opportunity for the investor community to form their own entities
to set standards—as discussed earlier. Fannie Mae and Freddie Mac are buyer entities;

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therefore, their standards are seen as stronger than credit agencies, which are currently
perceived as agents of the seller.336 A similar standard to the “conforming loan” category
for mortgages could be created for intangible asset-backed securities.
The creation of underwriting standards, with or without liquidity guarantees from a GSE
or other entity, would be an improvement over the current situation where each deal mustbe specifically and uniquely structured to meet the requirements of the credit rating
agencies. The development of a widely understood template for intangible-backed
securities would regularize the market and lower transaction costs.
It is unclear if the development of intangible-backed securities is far enough along to takethis next step. We may simply not yet have enough information and experience withthese financial instruments to develop such a template. On the other hand, the explicit
creation of mechanisms to undertake the development template can speed up the process.
The question of supply is also an important consideration when attempting to create astandardized template. Will there be enough of a deal flow to warrant the creation of sucha template-creating entity? The chicken and egg question looms large.
As a first step, standard-setting mechanisms should be explored, including the creation ofa limited government-sponsored enterprise to regularize the intangibles-backed securities
market. It is recognized that the creation of such an entity (call it the Intangibles
Mortgage Corporation—Ida Mae) would be highly controversial. Currently there is afierce debate over Fannie Mae and Freddie Mac, with important public policy issues atstake.337 But at this stage, an in-depth study of all mechanisms, including GSEs, is needed
to understand the costs and benefits. Nothing should be off the table based on ideology.
——
As part of the policies for greater identification of intangibles, it was noted earlier that a
broader definition of assets may be needed. In addition to aiding identification, a broader
definition of securitizable intangible asset classes might also open the door to morecreative financial securitization vehicles that support the monetization of heretofore
unusable asset classes. It is unclear whether the definition of asset-backed securities
applies to emerging forms of intangibles that may not be self-liquidating. The SEC
should undertake a review of security regulations to determine whether such a
modification is needed.
The SEC also needs to be generally aware of and sensitive to the emergence of theintangibles. Many securities laws and regulations may impact intangibles.338 Those
impacts are likely to emerge as the market in intangibles and intangible-backed financial
instruments grows. The SEC should take care not to place intangibles in an unfavorable
position, simply because they were not at the forefront of the discussion during the
adoption of the rules and regulations.
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Another way of regularizing the market for intangibles is through risk reduction via
insurance. Investors are more willing to lend if they know the underlying asset isprotected by some form of insurance. As noted earlier, securitization efforts often requirea credit enhancement/bond insurance. Sale, leasing, and collateralization of intangibles
may benefit from a similar expansion of insurance. Working in conjunction with existing
credit enhancement insurance products, the regularization of intellectual property
insurance would not only reduce risk but also help promote a set of standards that could
reduce transaction costs. To be cost effective, insurers will need to require a certain levelof intellectual asset management. A virtuous cycle could be created whereby therequirements to obtain insurance lead to better recognition and management of intangible
assets, including better risk management, which lead to lower insurance costs. The
government role here may not be to create these insurance products but rather to promote
financially sound products and prevent fraudulent ones. Thus, the various insurance
regulators should review insurance regulations to see what changes may be needed.
Given that insurance regulation is both a state and federal activity, this review will need
to be done on both levels.
Market Oversight
Policy Actions:• Work with credit rating agencies and monoline insurers to provide a transparent
process for rating intangible asset values• Coordinate with ongoing efforts at market reform, such as the President’s Working
Group on Financial Markets, to ensure that intangible-backed assets are properly
included.
From a policy perspective, it is imperative that market overseers and government
regulators stay on top of accurate financial disclosures. They must demand thoroughdisclosure of intangible assets and design a comprehensive means to do so. Previous
problems in the derivatives markets, mutual fund markets, stock markets, and subprime
mortgage markets showcase these concerns. In many cases, the regulators were as blindas the investors in understanding the financial manipulations perpetrated by financial
market innovations that skirted the rules and norms. Lending standards deteriorated as fee
revenues increased.339
The danger is especially acute for intangibles. Today’s accounting guidelines are too
incomplete for effective oversight on true corporate valuation. It is still too easy for firms
to prop up a financial house of cards on the promise of elusive intangible assets andlucrative future returns that cannot be accurately checked by investors.
The incentive for financiers to design products that meet their clients’ needs forintangible asset monetization could be quite lucrative. However, inadequate market rules
guiding these designs provide an opening for unscrupulous actions. Without clear rules
and oversight, this new financial market could go unchecked, creating an inevitabledisaster for the companies, investors, and markets that use these products. Much like theIntangible Asset Monetization – Athena Alliance77

junk bonds of the past, unchecked ideas that run rampant can leave investors andcorporate borrowers mired in financial commitments from which they can losesignificantly. Only through a proactive understanding of the direction and motivation
behind new financial products can a market overseer know where to look to be sure alltransactions remain on the up and up.
In this regard, the most pressing issue may be that of credit standards and enhancement.
Monoline insurers, which provide credit enhancement, are under severe financialpressure.340 There is a danger that, unless these insurers can be recapitalized or othercompanies can move into that business, the cost of underwriting new bond offerings will
significantly increase.341 Part of that recapitalization may well include stricter standards
and regulations.342
Rating agencies are currently under increased scrutiny as to how they initially rate andthen monitor and change their ratings, specifically of asset-backed securities. One major
issue has to do with how deals are structured in cooperation with the rating agencies togain a favorable rating.343 In some cases these bundles of securities were so complex thatthey become, as one commentator put it, “trust-me loans.”344
Ironically, asset-backed securities came into being in part because of deterioration in thequality of unsecured corporate credit.345 To restore the role of asset-backed securities, aclear understanding of the process is needed to calm investor (and regulator) jitters. As
Penner notes, “Today’s market is paralyzed with panic primarily because of a lack offaith and trust.”346 He suggests that “tweaking the securitization model would be torealign the interests of the governing bodies, that is, the rating agencies, more precisely
with those they truly represent—the bond buyers.”347 Creation of clear standards forvaluation and ratings, as discussed above, will also alleviate concerns—helping both therating agencies and the monoline insurers.
A related macroeconomic concern involves the systemic risk posed by such new financial
instruments.348 More and more questions are being raised about the scope and complexityof these instruments. It has become clear that the risks are unknown, including whom
exactly bears the risk in these layered instruments, where that risk is distributed within
the financial system, and how it correlates with other risks. One of the concerns in the
subprime meltdown was the lack of understanding as to the extent of the exposure. As aresult, buyers of these complex debt instruments pulled back from the market to firstassess their financial situation and to better understand exactly what they were buying.349
Whether these concerns will poison all asset-backed securities and lending of esotericasset classes, such as intangibles, remains to be seen. The securitization of intangibles isdifferent from mortgage-back securities in a number of important ways. As Lachmanpoints out, the process of securitization uncouples the revenue-generating asset fromthose who created it. In the case of mortgages, “it also gave the originator every incentive
to push out mortgage loans at an increasing pace without regard for how they would
perform over the longer term.”350 With IP securitization, the company holding the IP is
the originator. Even though ownership is transferred to an SPE, the originating company

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often keeps a management service. Thus, the servicing arrangement is a key break on
simply pushing volume out the door, irrespective of quality.
As a recent commentary noted, “The secondary market for outstanding CDOs
[collateralized debt obligations] is very limited, partially because the value of theirunderlying assets is often mysterious.”351 Malmgren points out that these securitized
assets are essentially illiquid.352 This is especially true for the so-called covenant-‘lite’
securities where the conditions are so weak that it is hard to seize the underlying asset incases of default. With strong covenants in intangible securitization, these types of
securities may be looked on more favorably by the markets.
However, the complexity of the debt instruments and the risks associated with SPEs arestill issues that must be dealt with. Increased transparency with respect to these assets andongoing oversight will help restore trust and stability. While this is a much larger issue
than just intangibles, those interested in facilitating the monetization of intangibles should
support efforts to increase transparency within these complex financial instruments.
The recent report of the President’s Working Group on Financial Markets (PWG) is a
step toward addressing many identified weaknesses in the financial system.353 Much of
the analysis, rightfully so, focuses on the current state of affairs. Mortgage securities andthe complex structured instruments spun off from those securities, often held in offbalance sheet vehicles, dominate the discussion. Intangibles, especially intangible assetbacked securities, were not even a mote in the eye of the PWG.
Many of the recommendations, however, may affect how intangibles are treated. For
example, one recommendation is that “[t]he PWG will engage the private sector to create
a committee to develop best practices regarding disclosure to investors in securitizedcredits, including ABS and CDOs [collateralized debt obligations] of ABS.”354
Information that should be disclosed in cases of intangible-backed securities is very
different from mortgage-backed securities. Best practices should encompass all forms of
ABS if they are to be effective. The PWG- sponsored committee will need to incorporate
those with expertise in intangible-backed securities.
This is but one example. Numerous other recommendations of the PWG may affectintangibles. A careful review of the PWG’s recommendations is needed; the PWG should
be cognizant of, and include expertise on, intangibles as it moves forward in
implementing its recommendations.
Perfection
Policy Actions:• Create a national central registry of intellectual property security interests.
Interrelated with the problem of identification and valuations is that of perfection. The
revision to the UCC Article 9 addressed many of the concerns of priority claim
infringements by the courts and simplified the UCC filing process. However, as discussed
earlier, there is still uncertainty between state and federal laws that apply to security

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interests. Each type of intellectual property is governed by a distinct body of statutory
and case law. Therefore, a creditor must examine each separately to determine the correct
method for taking a valid and perfected security interest. It is a burdensome but goodpractice to file a security interest at both state and federal levels to protect all of the
secured creditors’ interests. In addition, a creditor has no easy means to ascertain that theassets are not pledged on other securities.
In other areas, valuable tools already exist, such as the SEC’s Economic Data Analysis
And Retrieval (EDGAR) and the Municipal Securities Rulemaking Board’s (MSRB)
Municipal Securities Information Library (MSIL). These registries have served as themain source of information for perfection of securities and protection in the event of
litigation. There is no reason why such a central registry for intangibles should not exist
in the United States. Such a centralized registry of intangible assets will also serve as a
useful tool in the identification of these assets, thereby also helping unlock the issue ofsupply and demand.
Murphy and others have proposed the creation of a centralized registry that will “allow
practitioners, creditors, and other interested parties to conduct a single, comprehensive
search to uncover prior recorded interests and make a determination of an asset’s
encumbered status.”355 While the ideal solution would be a centralized database, Murphy
et al. proposed a portal-type system that would allow states to maintain control over theirown systems. The report outlines three legislative options for the creation of such aregistry: the Security Interests in Intellectual Property Restoration Act (SIIPRA), theIntellectual Property Security Interest Coordination Act (IPSICA), and the Intellectual
Property Collateral Coordination Act (IPCCA).
A pilot program sponsored by the U.S. PTO is currently underway. Its purpose is todevelop a “prototype Web technology-based system for perfecting security interests in
intellectual property rights.”356 The project, housed at the University of New Hampshire’sEnterprise Integration Research Center, also involves the Franklin Pierce Law Center andUniversity of Maine School of Law. As soon as the pilot system is publicly available, it
should be quickly evaluated with an eye toward rapidly expanding it into a national
central registry, along the lines of the legislative models proposed by Murphy andcolleagues.
Tax Incentives
Policy Actions:• Create a permanent knowledge tax credit that would increase investments inintangibles• Explore lowering the tax rate on intangible asset royalties, in conjunction with stricter
regulations on international transfer-pricing mechanisms and cost-sharing
arrangements and on passive investment companies• Review the impact of expensing versus depreciation on the investment in intangibles,
including the impact of the 2002 IRS regulations, Capitalizing Intangible Assets• Undertake a comprehensive review of the tax code as it relates to intangibles.

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Tax incentives are another way to promote intangible investment and to foster innovationin private markets. There are numerous specific tax incentives for innovation.357 Many ofthese proposals seek to spur innovation in general, while some specifically target thedevelopment of intangibles. The federal research and experimentation tax credit(generally known as the R&D tax credit) is one of the most talked about proposals.358 Not
as well known, but just as important, are various proposals for a knowledge investment
tax credit.359 These proposals would expand the R&D tax credit to also include worker
training. In both cases, the tax credit is given specifically for investments in the creationof knowledge assets. Creation of a permanent knowledge tax credit would be helpful inincreasing these investments.
Besides possible tax incentives for investments in R&D and human capital, there is thetreatment of such investments to take into account. As noted earlier, most of these fundoutflows are generally treated as immediate expenses for tax purposes, but there are cases
where depreciation is allowed. Either way can result in significant tax savings dependingon the situation. We do not fully understand the impact that expensing versus
depreciation has on the investment in intangibles. A review of the impact of the different
treatments is needed, including a review of the 2002 IRS regulations, Capitalizing
Intangible Assets.
Providing a more direct tax incentive to the licensing of intangibles by lowering the rate
on intangible asset royalties, such as to the capital gains rate, is a more controversial
proposal. This lower rate could be crafted to apply only to royalties for new licenses for alimited time, such as a sliding scale for three years. In crafting such an incentive,
safeguards would need to be established to prevent the incentive from being used forsimply transferring existing licenses to SPEs and to ensure that the incentive went to new
licensing activities only.
In conjunction with such a tax incentive, the problem of tax havens should be addressed.
Transfer pricing mechanisms and cost sharing arrangements need to prevent thosetransfers that, as the IRS describes, are “for inadequate consideration.” The issue (somewould say the abuse) of “passive investment companies” should also be handled.
The notion of tax havens and loopholes is often a matter of perspective. One person’sloophole is another person’s incentive. However, there is a growing concern that the tax
code has become overly complex and that rates could be lowered in conjunction with theelimination of certain specific provisions. Any such tax reform, including the possibilityof closing loopholes currently applied to intangibles and lowering the tax rate on
royalties, should be looked at very carefully in the context of the impact on the creation
and utilization of intangible assets.
Overall, taxes can affect the development of intangible assets in a number of other ways.
The issue of tax reform surfaces regularly on the political scene. In those discussions,most of the attention is focused on issues such as overall tax rates and existing provisions
that are related to tangible assets. Little attention is given to intangibles. However, given

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the importance of intangibles and the pervasiveness and complexity of the tax code, any
tax reform debate should include a comprehensive review of the code as it relates tointangibles.360
Patent Reform
Policy Actions:• Create a pre-review pilot program at U.S. PTO• Continue other efforts at the P.T.O. to increase patent quality in consensus with
relevant stakeholders• Enact patent reform legislation• Undertake a review of patent litigation and patent liability insurance• Review federal and state technology policies to encourage promotion of patent pools.
Two activities are already underway that will strengthen the role of patents and increase
certainty. First, the U.S. PTO is taking action to address the issue. One of the mostpromising U.S. PTO actions is a pre-review pilot program that is specifically designed toincrease the input of information on prior art.361 Under this program, participants may
suggest cases of relevant prior art, including a detailed description of the relevancy.
Participants will then vote to rank the top-10 cases to be forwarded to the patentexaminer. This program is voluntary on the part of the applicant. However, participation
should pay off in the form of a stronger and more valuable patent that has been subject toa more intense pre-grant review.
The U.S. PTO also continues to make a number of regulatory changes that are supposed
to improve patent quality. Most recently, the U.S. PTO published proposed rules
concerning the drafting of patent applications (claims) that contain more than one
independent and distinct invention, and final rules on the use of multiple claims andrequests for continuation.362 These changes, however, are not without controversy. Critics
claim that the changes will hurt biotechnology companies, while others in the information
technology industry support the changes.363 The U.S. PTO should be encouraged toundertake regulatory reform efforts to strengthen patent quality. But such efforts should
be carefully examined to ensure that they meet that goal.
Second, legislation that will make changes in a number of areas is making its way
through Congress.364 This legislation is not perfect and has numerous critics andopponents. But overall it does represent a major step forward. It should help reduce
uncertainty over patent validity, help reduce lawsuits, and move toward international
harmonization of the patent system—all of which will improve the patent-investment
climate.
Patent reform is needed at the front end, back end, and in the internal process. The front
end of the process needs more information, such as input related to “prior art,” to ensurethat items already covered by patents are not covered again. At the back end, a post-grant
review process needs to be instituted to challenge wrongly granted patents. Better criteria

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for determining infringement and damages should also be established. And the internal
processes and criteria granting patents (novelty) should be improved.
What is the investor’s interest? If the investor is seeking a steady income flow throughthe purchase of an asset-backed security, then the investor’s interest is in a predictableroyalty stream. To determine if the existing royalty stream is sustainable, the investor
needs to know that the patents on which that royalty stream is based are valid andenforceable. The investor also needs assurances that the patent can be defended. If thebusiness model is based on creating new royalty streams (or even on garnering
infringement awards), then the investor requires some certainty of success.
History may provide a lesson. Lamoreaux and Sokoloff argue that the patent reform of1836 was important in opening up patents as an investment tool:
A key innovation in the design of the system … was the practice of examining
applications for novelty and conformity with the statutes before granting patents.
This feature was of fundamental significance because approval from technicalexperts reduced uncertainty about the validity (or value) of patents. Inventors
could more readily sell or license patents and realize a return to their ideas in thatway, use the patent rights (or the prospects thereof) to raise funds to continue
developing or commercializing the inventions, or accomplish both ends
simultaneously.365
That implied government stamp of approval continues to be a major factor in patenting—even though every patent expert warns that such implied approval doesn’t really exist. It
is that sense of validity, however, that makes the patent a tradable commodity; without
such faith that a patent really stands for something, the system collapses.
Even some critics of the patent reform legislation agree that the current system does notserve investors well. As Frank notes:
Suppose someone comes up with an innovation, and then stumbles across a badpatent on which the invention might infringe. Even if the inventor is willing toresort to litigation to invalidate the patent, the courtroom doors remain closed
until the patent’s owner either sues the innovator or makes an overt threat. Only
then can the innovator file for a declaratory judgment that the patent is either
invalid or does not cover the invention. But in the meantime, the sword of
Damocles is hanging overhead, increasing risk and thus discouraging investors.366
But Frank is more concerned that the post-grant review process will “suddenly makepatents a far [riskier] proposition”:
Because investors assume they are investing in the winners—that is, in research
likely to be profitable and therefore to invite patent oppositions—values placed ontechnology companies will probably fall as perceived risk, expense, and delay
increase. Inventors, for their part, may fear that the visibility of professional
investment can turn otherwise unobtrusive patents into targets.367

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The key phrase is that investors assume they are investing in valid patents. As someargue, the market needs both good deals and bad deals to set a price—for example, bothPark Avenue condos and Florida swampland. But the current system is such that both
good deals and bad deals suffer more from uncertainty of ownership and not necessarily
from uncertainty over the value of the deal. Imagine a real estate market where not only
can no one determine who owns the Brooklyn Bridge, but also whether a person owns
their own house.
A key goal of patent reform therefore should be increased certainty and greatertransparency. The market needs clear information and a mechanism for smoothcommercial negotiations, rather than the current process of validation by litigation.
——
Final resolution of the current patent legislation will not end the patent wars, however.
Investors in intangible assets need to understand that intellectual property rights willcontinue to be an evolving arena.
In that regard, the issue of patent litigation and patent liability insurance should be anarea of further inquiry. A workable insurance system—covering both the cost of bringing
litigation and the cost of potential liability—might be able to serve as a replacement forthe defensive patent syndrome. On the liability side, the European Commission reportmentioned earlier determined that such insurance would be beneficial, but that a
voluntary system would not work.368 Any European-wide system would need to becompulsory.
However, the Danish Patent and Trademark Office has long encouraged the creation of apatent litigation insurance system for small businesses.369 As a first step, the Danish
insurance company Dahlberg joined with Samian Underwriting Agencies to offer anenforcement policy beginning in December 2007: PatentEnforcerTM.370 This is first-party
coverage to offset the cost to small and medium-size enterprises (SMEs) of bringing apatent-infringement case.
Options for expanding patent insurance should be explored in the U.S. as well. Patent
litigation insurance would give patent holders, especially SMEs, a greater level ofcomfort that their rights would be protected. This might help alleviate the concern
expressed by small inventors about being overwhelmed in the courts. Patent-liability
insurance would help protect companies developing new products. The financial risks forboth sides might then be lowered.
Thus, either separately or as part of the ongoing patent reform legislation, Congress may
wish to consider requiring a review of the patent insurance system.
The review might also look at an expanded form of directors and officers (D&O)
insurance to protect against class-action lawsuits due to a loss of company value becauseof alleged mismanaging or undermanaging of the IP portfolio (as mentioned earlier). The

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review should also include trade-secret insurance, which has been even less successful
than patent insurance.371
Such insurance, however, would have to be more akin to employment practices liability
insurance because the key feature is divulging of the protected information by employees.
As such the underwriting risk entails looking at a company’s policies and procedures
related to training of its employees, vendors, and consultants on what trade secrets are
and on which information the company considers to be trade-secret-protected.
Another area for closer analysis is the question of patent pools. Throughout history,
patent pools have been organized for a number of reasons, running from cartelization to
the setting of standards.372 A 2000 report by the U.S. PTO found that patent pools can bebeneficial in the biotechnology area.373 Federal guidelines for looking at the antitrust
implications are spelled out in a 1995 document.374 A 2007 review found those guidelines
to be working well.375 Given that guidelines are well established and widely understood,
greater promotion of patent pools could be a feature of the state and federal technology
policies.
Spurring Licensing and Facilitating Sale
Policy Actions:• Undertake a review how the federal technology transfer system, including Bayh–Dole, does or does not facilitate the creation of intangible assets.
Many of the actions listed above will also help increase the sale and licensing ofintangibles. For example, increased requirements to disclose intangibles will increase thelikelihood that those assets will be viewed as something with a value that should be
maximized.
There may be other ways to spur the greater use of intangible assets. Support for
intellectual property sales mechanisms, such as the OceanTomo actions, and licensing
activities, including the patent pools mentioned earlier, would facilitate the process.
However, it is unclear what government actions would be involved in this regard.
A more direct action would be a review of federal technology transfer activities. As
mentioned earlier, these activities are governed by a number of laws, including
Stevenson–Wydler and Bayh–Dole. These laws are intended to promote the transfer oftechnology from government laboratories and provide for recipients of federal researchfunds to retain the intellectual property rights coming out of that research. However, there
is some concern that this technology transfer system, especially the Bayh–Dole Act, is
not as helpful as it could be. Some argue that the system has not done enough, especiallyin transferring technology out of government labs.376 Others argue that the system has theperverse effect of locking up technologies as universities and government laboratories
seek to maximize their patent royalties.377

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There does not appear to be any major movement toward changing federal technology
transfer law. However, to facilitate the creation of intangible assets, a review of thefederal technology transfer system—what works and what doesn’t—may be in order.
Facilitating Bank Lending
Policy Actions:• Undertake a review of the Basel II Accords to better understand their implications forintangible-backed lending• Review SBA laws and regulations to ensure that SBA loans can be used for theacquisition of intangible assets and that intangible assets can be used as collateral forsuch loans• Require SBA to work with its commercial lenders to develop standards on the use ofintangible assets as collateral, similar to existing SBA underwriting standards• Undertake a review of all other federal government business loan programs to ensurethat intangible assets are properly treated.
The greatest impact the government has on bank lending is through regulation. As
mentioned earlier, the Basel II Capital Accords have established regulations for how
banks manage lending risk.378 However, it is not clear that these standards take into
account the type of lending risk associated with intangibles. For example, to recognize
collateral as part of a bank’s credit risk mitigation (CRM) techniques, the bank must have“clear and robust procedures for the timely liquidation of collateral to ensure observationof any legal conditions required for declaring the default of the borrower and prompt
liquidation of the collateral in the event of default.”379 Terms such as “timely” and“prompt” may be problematic when applied to the liquidation of intangible assets used ascollateral.
According to the Comptroller of the Currency, U.S. banks have until April 2011 to makethe transition to the new rule and have not yet set hard deadlines the switch over.380 Thus,
there is still time before these standards are fully implemented. A thorough review of theBasel II Accords should be undertaken to better understand their implications forintangible-backed lending.
There are only a few other areas where the government has direct impact on banklending. One of these is the SBA program for loans to small businesses. As mentioned
earlier, of specific relevance are both the 7(a) guaranty loan program and the CDC/504
loan program.
The SBA’s treatment of intangibles is uneven. SBA documents recognize intangibles as aclass of property, but never clarify their role as an asset.381 Use of loaned funds for thepurchase of intangibles (i.e., buying a patent or signing a licensing agreement) seems tofall outside the permitted activities of SBA guidelines, although purchases of franchises
are eligible. Likewise, the use of intangible assets as collateral is uncertain. The National
7(a) Lender Guide specifically includes intangible assets in the prohibition on use offunds for speculative purposes.382 But the guide says nothing about the use of intangible

Intangible Asset Monetization – Athena Alliance86

assets as collateral. The application for a 504 loan includes a section for balance sheet
comments and adjustments for intangibles, but intangibles are not mentioned elsewherein the document.383 The SBA standard operating procedure (SOP) for processing requests
for financial assistance includes instructions for modifying the balance sheet concerning
intangibles and instructions to report the use of loan proceeds to “acquire intangible
assets such as licenses or franchises” under the category of “Other Uses of SBA
Proceeds” in 7(a) reports.384 However, there is at least one referenced case where“general intangibles” were used as collateral.385
Given this spotty record, the SBA should undertake a review of laws and regulations toensure that SBA loans can be used for the acquisition of intangible assets and that these
intangible assets can be used as collateral for such loans.
Such a review would also present an opportunity for a larger look at the role ofintangibles in bank lending. Thus, the SBA should also work with their commercial
lenders to develop standards for the use of intangible assets as collateral, similar toexisting SBA underwriting standards.
In addition, a review should be undertaken of all other federal government business loan
programs to ensure that intangible assets are properly treated.

Intangible Asset Monetization – Athena Alliance87

Conclusion
Intangible assets account for the majority of the value of most firms in the United States.
Changes in the economy toward more innovation-based activities signify an even greater
importance of intangibles in the mix of corporate assets in the future. The need forfinancial solutions and policies to open doors for intangible asset monetization isimperative. Innovation requires funding. Historically, companies have only been able toleverage funds based almost solely on their tangible assets. Now more than evercompanies need to be able tap into the value of their intangible assets as a source ofbusiness capital for critical innovation advancement and long-term business development.
To spur financing, both primary markets for intangibles and secondary capital markets
need further development. Some primary markets for select classes of intangibles arewell developed (e.g., for books and songs) and others are making strides (e.g., forpatents). On the capital markets side, some financial market product innovations havebegun to incorporate these assets. However, most intangibles have no capital leveragecapability—yet.
Parts of the process, such as licensing, are well understood with regularized processes. In
other areas, such as with intangible asset-backed securitization, normalized activities are
not defined and modeled. Each deal runs perilously close to having to reinvent the wheel
and is susceptible to the often blindly subjective view of the credit analyst, underwriter,and, ultimately, the investor. Capital leveraging areas such as collateralization lie
somewhere in the middle, with some routine processes but few distinctly consistent orobjective approaches. To realize the promise of intangibles, industry standards andgovernment regulations should be developed that more clearly define the characteristics
and values of these assets while fostering standardization of the process.
Numerous actions, both large and small, are required to cause effective change. There isno magic bullet; no single government or industry action will resolve the issues. But
policymakers play a key role in promoting the acceptance, use, and dissemination of
intangible assets in the market. Areas in need of attention range from patent reform tosecurities definitions and banking regulations, from perfection and bankruptcy law toaccounting techniques, and from technology to tax policy. Industry standards andprocedures also need attention, especially in the area of valuation.
Perhaps the single most important step is the recognition that intangible assets are notcovered in existing financial structures. Much of our current economic policy andregulatory systems, both public and private, are still set up for the industrial era ofbuildings, fixed resources, machinery, and other tangible assets. This is not surprising—these are the systems that have evolved over the past few centuries as the industrial
revolution unfolded. That evolution has been painful and painstaking. We should not be
in a rush to replace the framework based on some ephemeral notion that “everything haschanged.”Intangible Asset Monetization – Athena Alliance88

But while the economy has moved on relatively fluidly, our ability to oversee it has
lagged behind. There clearly is something novel about the “new economy.” Intangible
assets—knowledge, ideas, skills, relationships, and organization—have taken on greater
worth. Monetization of those intangible assets is one step in the process of value creation.
As the economy continues to evolve, our policies and structures for monetization need toadapt as well.
The reality is that we are still far from realizing the full promise of intangible
monetization. But recognizing, valuing, and utilizing intangible assets in the marketplace
are essential components for the continued success of U.S. enterprises and for the
economic prosperity of the entire nation.

Intangible Asset Monetization – Athena AllianceAppendix A. Lists of Intangible Assets According to Different
Standardsa) Financial Accounting Standards Board—SFAS 141
a. Marketing-related intangible assets(1) Trademarks, tradenames(2) Service marks, collective marks, certification marks(3) Trade dress (unique color, shape, or package design)(4) Newspaper mastheads(5) Internet domain names(6) Noncompetition agreements.
b. Customer-related intangible assets(1) Customer lists(2) Order or production backlog(3) Customer contracts and related customer relationships(4) Noncontractual customer relationships.
c. Artistic-related intangible assets(1) Plays, operas, ballets(2) Books, magazines, newspapers, other literary works(3) Musical works such as compositions, song lyrics, advertising jingles(4) Pictures, photographs(5) Video and audiovisual material, including motion pictures, music videos, television
programs.
d. Contract-based intangible assets(1) Licensing, royalty, standstill agreements(2) Advertising, construction, management, service or supply contracts(3) Lease agreements(4) Construction permits(5) Franchise agreements(6) Operating and broadcast rights(7) Use rights such as drilling, water, air, mineral, timber cutting, and route authorities(8) Servicing contracts such as mortgage servicing contracts(9) Employment contracts.
e. Technology-based intangible assets(1) Patented technology(2) Computer software and mask works(3) Unpatented technology(4) Databases, including title plants(5) Trade secrets, such as secret formulas, processes, recipes.

89

Intangible Asset Monetization – Athena Alliance

90b) AICPA—American Institute of Certified Public Accountants
Airport gates and slots
Bank customers, including deposits, loans,trusts, and credit cards
Blueprints
Book libraries
Brand names
Broadcast licenses
Buy-sell agreements
Certificates of need
Chemical formulas
Computer software
Computerized databases
Contracts
Cooperative agreements
Copyrights
Credit information files
Customer contracts
Customer and client lists
Customer relationships
Designs and drawings
Development rights
Distribution networks
Distribution rights
Drilling rights
Easements
Employment contracts
Engineering drawings
Environmental rights
Federal Communication Commission
licenses
Favorable financing
Favorable leases
Film libraries
Food flavorings and recipes
Franchise agreements
Historical documents
Heath maintenance organization enrollment
lists
Insurance expirations
Insurance in force
Joint ventures
Know-howLaboratory notebooks
Landing rights
Leasehold interests
Literary works
Loan portfolios

Location value
Management contracts
Manual databases
Manuscripts
Medical charts and records
Mineral rights
Musical compositions
Natural resources
Newspaper morgue files
Noncompete covenants
Options, warrants, grants, rights
Patent applications
Patents (both product and process)Patterns
Permits
Prescription drug files
Prizes and awards
Procedural manuals
Production backlogs
Product designs
Property use rights
Proposals outstanding
Proprietary computer software
Proprietary processes
Proprietary products
Proprietary technology
Publications
Retail shelf space
Royalty agreements
Schematics and diagrams
Securities portfolios
Security interests
Shareholder agreements
Solicitation rights
Stock and bond instruments
Subscription lists
Supplier contracts
Technical and specialty libraries
Technical documentation
Technology-sharing agreements
Title plants
Trade secrets
Trained and assembled workforce
Trademarks and trade names
Training manuals
Use rights (air, water, and land)Intangible Asset Monetization – Athena Alliance91c) Low/Kalafut List of Intangibles to Company Performance
Jonathan Low and Pam Cohen Kalafut have created a model that links intangibles tocompany performance.386 They base their model on the following intangibles that play arole in business:•••

Management/Leadership• Strategy Execution• Communication• Transparency.
Organization• Technology and Processes• Human Capital• Workplace, Organization, and Culture• Innovation• Intellectual Capital• Adaptability.
Relationships• Brand Equity• Reputation• Alliances and Networks.

Intangible Asset Monetization – Athena Alliance92

Appendix B. Special Purpose Entities (SPEs)
At the heart of securitization is the Special Purpose Entity (SPE), also known as theSpecial Purpose Vehicle (SPV). The SPE acts to segregate an asset class from the parent
business to protect it from claims that could undermine the priority claim of the investors
in the securitization. It acts as a separate owner of the asset rights—an independent third
party to the transaction—that either holds the asset claims as collateral against the issued
asset security or forwards the asset ownership rights to investors through thesecuritization process. Securitizations can use two SPEs—one to segregate asset claims
from the parent company, and another to then purchase those assets and issue them in asecuritized offering.
The SPE effectively purchases the assets from the parent company, usually using thefunds from the securitization offering to do so. It may then lease back the usage rights of
the assets to the parent company. Since the sale of the assets demonstrates an actual
transfer of ownership rights, and often at market rates for the asset, liability or credit
default claims on the parent company cannot attach legal claims on the assets posttransfer. From a securitization investor standpoint, this is an absolutely essential
component in their investment in the security. They have a protected priority claim on theasset that collateralizes their investment, even if the parent company itself were to go
bankrupt.
The company that uses securitization to raise capital can also find significant advantages
to the SPE asset transfer. First, the securitization stands on the merits of its asset classalone and can be held separate and unaccountable from any credit quality restraints of theissuing company. Capital costs in securitizations tend to be significantly lower, likely due
in part to the reduced risk of default and liability claims. In fact, securitized assets havedistinct advantages over equity claims on an entire company that cannot offer such
absolute protection to investors. Furthermore, the issuing company can protect some ofits most vital or provocative assets through securitization, using the SPE as both a capital
generating tool and as a useful insurance policy.
In the article Death of Liability, Lynn LoPucki states:387
Asset securitization is both a substitute for borrowing and a powerful new strategy
for judgment proofing. Like the parent-subsidiary strategy, the asset securitization
strategy puts ownership of the company’s valuable assets in an entity separate
from the one that is at risk for liability. The advantage … is virtual elimination of
the risk that the courts will disregard the entity that holds the assets. Though thebankruptcy remote vehicle is created pursuant to the debtor’s plan, it is not only
separately incorporated but it is at all times controlled by arms-length investors.
What is perhaps more important, by the times the issues are litigated, thebankruptcy-remote vehicles may be publicly held with hundreds or thousands ofinnocent investors. Considering that even the most provocative division of acompany into separate asset-holding and liability-incurring entities—one with 100
percent congruity of ownership—is likely to be honored by the courts, it seems
unlikely that the courts will consolidate the bankruptcy-remote vehicles created inIntangible Asset Monetization – Athena Alliance93

asset securitizations, which typically have no congruity of ownership with the
debtor.
[S]tocks and bonds are the most junior claims against the assets of a company.
They are defeated by anyone with a direct claim against the assets. The claims ofthird-party owners, such as those created in asset securitization, are the mostsenior claims. Perhaps the principal advantage of third-party ownership of assets
over mere ownership of the company is that third-party owners of assets havepriority over liability claims while stockholders do not.
Ideally, an SPE offers investors both priority (a superior claim in the ranking of claims
against an asset) and perfection (legal protection to for asset ownership) in their claims on
the securitized asset. Presently, these rights are covered by state laws, often in the state
where the asset itself is located (or the parent business for intangible assets). However,the fallout from Enron’s scurrilous use of SPEs has garnered intense focus from federal
lawmakers intent on corralling potential abuses of the device as a means to
unscrupulously harm company employees or investors. The off-balance-sheet nature ofSPEs coupled with their cocooning effect for company assets against creditor claims,
make them susceptible to future legislative restrictions. Recent revisions to Article 9 of
the Uniform Commercial Code (UCC) offer promise for the continued, if not enhanced,
protection for parties in SPEs, broadening the scope to “virtually all securitized assets”
and ensuring clear legal guidelines to support the transfer of asset claims from the issuing
company to the SPE.388
However, legal claims on SPE assets are still evolving. Since these transactions arecovered by state courts, geographic variability in court decisions could pose problems forsecuritization. Furthermore, intangible assets will likely create unique problems as
securitizations begin using more creative asset offerings. Determining the court
jurisdiction for intangible assets could be contested, for instance. Plus, since many
intangible asset classes have never been legally reviewed for ownership rights insecuritizations, there remains the possibility that courts could rule on them with separate
bias. Nonetheless, the scope of asset protection with securitization seems to bebroadening not retracting as the revisions of UCC Article 9 illustrate. Diligent andappropriate use of the SPE mechanism should help remove lawmakers’ doubts that it is avital tool for corporate, and thus economic, growth.

Intangible Asset Monetization – Athena Alliance94

Appendix C. Possible Policy-Related Actions
Identification and disclosure:•

Reinstate the joint FASB and IASB research project on expanded disclosure
guidelines for intangibles.

•

Review and revise SEC definitions of asset-backed securities to include intangible
asset classes.

•

Clearly designate nonfinancial measures for evaluating intangibles in MD&A
portion of financial statements.

•

Create a safe harbor in financial statements for corporate reporting of intangible
assets.

•Modify Sarbanes–Oxley so that there is a clear directive for assessments of the“material” intangible assets.

•

Utilize the stock exchanges (and the proposed Intellectual Property Exchange in
Chicago) as initial testing grounds for increased intangible disclosure by requiring
listed members to make additional disclosures that capture intangible metrics.

•

Create an intangibles reporting and valuation guideline association/group, similar
to the International Private Equity and Venture Capital Valuation Group and theEnhanced Business Reporting Consortium.

Valuation standards:•

Convene a special FASB/SEC task force on valuation.

•

Support and encourage increased research on valuation standards.

•

Work with the International Standards Organization efforts to set brand and patentvaluation standards to ensure that relevant expertise and stakeholders are engaged.

Intangible Asset Monetization – Athena Alliance

Regularizing the market:•

Explore the creation of an Intangibles Mortgage Corporation (Ida Mae) toregularize the intangibles-backed securities market, either as a limited
government-sponsored enterprise GSE or as an independent organization.

•

Review all security regulations to determine their applicability to intangibles.

•

Review federal and state insurance laws and regulations to promote thedevelopment of financial sound insurance coverage of intangibles.

Market oversight:•

Work with credit rating agencies and monoline insurers to provide a transparent
process for rating intangible asset values.

•

Coordinate with ongoing efforts at market reform, such as the President’s
Working Group on Financial Markets, to ensure that intangible-backed assets areproperly included.

Perfection:•

Create a national central registry of intellectual property security interests.

Tax incentives:•

Create a permanent knowledge tax credit that would increase investments inintangibles.

•

Explore lowering the tax rate on intangible asset royalties, in conjunction withstricter regulations on international transfer pricing mechanisms and cost-sharing
arrangements and on passive investment companies.

•

Review the impact that expensing versus depreciation has on the investment inintangibles, including a review of the impact of the 2002 IRS regulations,
Capitalizing Intangible Assets.

•

Undertake a comprehensive review of the tax code as it relates to intangibles.

95

Intangible Asset Monetization – Athena Alliance

96

Patent reform:•

Create a pre-review pilot program at U.S. PTO.

•

Continue other efforts at the P.T.O. to increase patent quality in consensus with
relevant stakeholders.

•

Enact patent reform legislation.

•

Undertake a review of patent litigation and patent liability insurance.

•

Review federal and state technology policies to encourage promotion of patentpools.

Spurring licensing:•

Undertake a review how the federal technology transfer system, including Bayh–Dole, does or does not facilitate the creation of intangible assets.

Facilitating lending:•

Undertake a review of the Basel II Accords to better understand their implications
for intangible-backed lending.

•

Review SBA laws and regulations to ensure that SBA loans can be used for theacquisition of intangible assets and that intangible assets can be used as collateralfor such loans.

•

Require SBA to work with its commercial lenders to develop standards for the useof intangible assets as collateral, similar to existing SBA underwriting standards.

•

Undertake a review of all other federal government business loan programs toensure that intangible assets are properly treated.

Intangible Asset Monetization – Athena Alliance97

Endnotes
1

Nakamura, L. Intangibles: What Put the New In the New Economy? Business Review,
Federal Reserve Bank of Philadelphia, July/August 1999, pp. 3–19.
Nakamura, L. What Is The U.S. Gross Investment In Intangibles? (At Least) One Trillion
Dollars A Year! Working Paper No. 01–15. Federal Reserve Bank of Philadelphia,
October 2001.
http://www.phil.frb.org/files/wps/2001/wp01-15.pdf
Nakamura, L. A Trillion Dollars a Year in Intangible Investment and the New Economy.
Intangible Assets: Values, Measures and Risks (Hand, J., and L. Baruch, eds.). Oxford
University Press, 2003.
Corrado, C. A., C. R. Hulten, and D. E. Sichel. Measuring Capital and Technology: An
Expanded Framework. Federal Reserve Board, August 2004.
http://www.federalreserve.gov/pubs/feds/2004/200465/200465pap.pdf
Intangible Capital and Economic Growth. Working Paper No. 11948. National Bureau of
Economic Research, January 2006.
http://www.nber.org/papers/w11948
2

Invisible Business. Brand Finance, London.
http://www.brandfinance.com/Uploads/pdfs/Invisible%20business.pdf
3

Global Intangible Tracker 2006: An Annual Review of the World’s Intangible Value.
Brand Finance and The Institute of Practitioners in Advertising, London,
December 2006.
http://www.brandfinance.com/Uploads/pdfs/Global%20Intangible%20Tracker%202006.
pdf
4

Appendix B. Vickery v. Welch In Trade Secret Asset Management (Halligan, R. M., and
R. F. Weyard), Aspatore Books, Boston, 2007, pp. 181–186.
5

van Dulken, S. Inventing the 19th Century. New York University Press, New York,
2001, p. 86.
Also, this transaction led to a major patent law case, Waterman v. Mackenzie, 138 U.S.
255 (1891), where the Supreme Court ruled that a licensee without title cannot sue forinfringement.
Murphy, W. J. A Proposal for a Centralized and Integrated Registry for Security Interest
in Intellectual Property, Appendix 19—Waterman v. Mackenzie IDEA: The Journal of
Law and Technology, Vol. 41, Nos. 3 & 4, 2002, pp. 561–562.
http://www.idea.piercelaw.edu/articles/41/41_3-4/Appendices/19.Appendix.pdf
6Peterka, K., and R. P. Ormond. How to Secure an Interest in Intellectual Property.
Remedies Newsletter, Buchalter Nemer, November 2006.
http://www.buchalter.com/bt/index.php?option=com_content&task=view&id=81&Itemid=77

Intangible Asset Monetization – Athena Alliance98

7

For one example of the promise, see Rivette, K. and D. Kline. Rembrandts in the Attic:
Unlocking the Hidden Value of Patents. Harvard Business School Press, Cambridge,
Mass., 1999.

8

Note: As Prof. Baruch Lev suggests, the terms intangible, intellectual capital, andknowledge assets are used interchangeably: intangibles in the accounting literature,knowledge assets by the economist, and intellectual capital in the management and thelegal literature.
Lev, B. Intangibles: Management, Measurement, and Reporting. Brookings Institution
Press, Washington, D.C., 2001.
9

Daum, J. H. Intangible Assets and Value Creation. John Wiley and Sons, New York,
2003, pp. 16–17.
10

Lev, op. cit., p. 5.

11

Lev, op. cit., p. 7.

12

Daum, ibid.

13

Contractor, F. J. Intangible Assets and Principles for Their Valuation. In Valuation of
Intangible Assets in Global Operations (F. J. Contractor, ed.), Quorum Books, 2001, p. 7.
14

Zambon, S., et al. Study on the Measurement of Intangible Assets and AssociatedReporting Practices. Commission of the European Communities, Enterprise Directorate
General, April 2003, p. 18.
http://ec.europa.eu/enterprise/services/business_related_services/policy_papers_brs/intan
giblesstudy.pdf
15

For a more complete description of intangible assets, see our earlier reports:
Jarboe, K. P. Reporting Intangibles: A Hard Look at Improving Business Information in
the U.S. Working Paper #1, Athena Alliance, April 2005.
http://www.athenaalliance.org/apapers/ReportingIntangibles.htm
Jarboe, K. P. Measuring Intangibles: A Summary of Recent Activity. Working Paper #2,
Athena Alliance, April 2007.
http://www.athenaalliance.org/apapers/MeasuringIntangibles.htm
16

Financial Accounting Standards Board. Statement of Financial Accounting Standards
No. 141: Business Combinations. June 2001.
17

AICPA Special Committee on Financial Reporting. Improving Business Reporting—A
Customer Focus: Meeting the Information Needs of Investors and Creditors. 1994.

Intangible Asset Monetization – Athena Alliance99

18

Merck, F., M. Hall, and E. Vail. Banking and Venture Capital Metrics. Policy Research
into Innovation and Measurement (PRISM) Work Package 7, June 2003.
19

Daum, op. cit., p. 399.

20

Daum, op. cit., p. 401.

21

Accenture. Intangible Assets and Future Value. Accenture/Economist Intelligence
Unit, 2003.

22

Kaplan, R., and D. Norton. The Balanced Score Card. Harvard Business School Press,
Boston, 1996.
http://www.balancedscorecard.org
23

Danish Ministry of Science and Technology. Intellectual Capital Statements. February2003.
http://www.urjc.es/innotec/tools/Intellectual%20Capital%20Statements%20%20The%20New%20Guideline.pdf
24

Edvinsson, L., and M. Malone. Intellectual Capital: Realizing Your Company’s True
Value by Finding Its Hidden Brainpower. HarperBusiness, 1997.
25

See http://www.sveiby.com/articles/IntangAss/CompanyMonitor.html.

26

Eccles, R. G., R. H. Herz, M. E. Keegan, and D. M. H. Phillips. The Value Reporting
Revolution: Moving Beyond the Earnings Game. John Wiley & Sons, Inc., New York,
2001.
DiPiazza, S. A., Jr., and R. G. Eccles. Building Public Trust: The Future of Corporate
Reporting. John Wiley & Sons, Inc., New York, 2002.

27

Andriessen, D., and R. Tissen. Weightless Wealth: Finding Your Real Value in a
Future of Intangible Assets. Financial Times, Prentice Hall, London, 2000.

28

Boulton, R. E. S., B. D. Libert, and S. M. Samek. Cracking the Value Code.
HarperBusiness, New York, 2000.
29

Low, J., and P. C. Kalafut. Invisible Advantage: How Intangibles Are Driving Business
Performance. Persus, Cambridge, MA, 2002.
http://www.predictiv.net
See also Low, J. The Invisible Advantage. Presented at Athena Alliance, Jan. 23, 2003.
http://www.athenaalliance.org
30

Badenahuusen, K. Asset Assessment. Forbes, Oct. 28, 2002.

Intangible Asset Monetization – Athena Alliance100

http://www.euintangibles.net/library/localfiles/Forbes%20Asset%20Assessment%20doc%2010%2002.pdf
31

For example, see Rising Above the Gathering Storm: Energizing and Employing
America for a Brighter Economic Future. Committee on Prospering in the Global
Economy of the 21st Century: An Agenda for American Science and Technology,
National Academy of Sciences, National Academy of Engineering, Institute of Medicine,2005.
http://www.nap.edu/catalog/11463.html
32

Lamoreaux, N. R., and K. L. Sokoloff. Introduction: The Organization and Finance ofInnovation in American History. Financing Innovation in the United States, 1870 to
Present. MIT Press, May 2007, p. 27.
http://mitpress.mit.edu/catalog/item/default.asp?ttype=2&tid=11196&mode=toc
33

Jenkins, E. L. Roundtable Meeting and Discussion of Accounting for Goodwill. U.S.
Senate Committee on Banking, Housing and Urban Affairs, June 14, 2000.
34

Financial Accounting Standards Board. Statement of Financial Accounting Standards
No. 141: Business Combinations. June 2001. Also, Statement of Financial AccountingStandards No. 142: Goodwill and Other Intangible Assets. June 2001.
http://www.fasb.org
35

Securities and Exchange Commission. Conditions for Use of Non-GAAP Financial
Measures. Final Rule. 17 C.F.R., Parts 228, 229, 244, and 249 [Release No. 33–8176,
34–47226, FR-65, File No. S7–43–02], RIN 3235–A169, 2002.
http://www.sec.gov/rules/final/33-8176.htm
36

Jarboe, K. P. Reporting Intangibles: A Hard Look at Improving Business Informationin the United States. Working Paper #1, Athena Alliance, April 2005.
http://www.athenaalliance.org/apapers/ReportingIntangibles.htm
37

Andreoli, B., and E. Dembitz. Valuation of Intangibles for Financial and Tax Purposes… or EPS v. the IRS—earnings per share. The Tax Executive, May–June 2003.
http://www.findarticles.com/p/articles/mi_m6552/is_3_55/ai_106097233
38

Securities and Exchange Commission. Interpretation: Commission Guidance
Regarding Management’s Discussion and Analysis of Financial Condition and
Results of Operations. Final Rule. 17 C.F.R., Parts 211, 231, and 241 [ReleaseNos. 33–8350; 34–48960; FR-72]. Dec. 19, 2003.
http://www.sec.gov/rules/interp/33-8350.htm
39

Jarboe, Reporting Intangibles, op. cit.

Intangible Asset Monetization – Athena Alliance

40

Securities and Exchange Commission, Interpretation, op. cit.

41

Securities and Exchange Commission, Sarbanes–Oxley Act of 2002, Section 108.

101

42

Banham, R.Valuing IP Post-Sarbanes–Oxley. Journal of Accountancy, November
2005.
http://www.aicpa.org/pubs/jofa/nov2005/banham.htm
43

Anderson, G. Sarbanes–Oxley Act: The IP Audit & Strategy Development Process.
Oregon Intellectual Property Newsletter, Vol. 6, No. 1, Spring 2005, pp. 6–10.
http://www.lclark.edu/~ipso/OIPN/vol6no1.pdf
44

Kroll. Intellectual Property Management.
http://www.kroll.com/services/ifai/intellectual%5Fproperty
Comments by Cauthorn, K. K., at session Intellectual Property and Intangible Assets:
Growth of a New Asset Class. Milken Institute Global Conference 2007, April 25, 2007.
Audio available at
http://www.milkeninstitute.org/events/gcprogram.taf?function=detail&EvID=1016&even
tid=gc07
45

IASC Foundation. Technical Summary: IAS 38: Intangible Assets.
http://www.iasb.org/NR/rdonlyres/149D67E2-6769-4E8F-976D6BABEB783D90/0/IAS38.pdf
IAS Plus website, Standards: IAS 38.
http://www.iasplus.com/standard/ias38.htm
46

For more on the gap between financial (book) accounting and tax accounting, seeMills, L. F., and G. A. Plesko. Bridging the Reporting Gap: A Proposal for More
Informative Reconciling of Book and Tax Income. The Brookings Institution, April 2,
2003.
http://www.brook.edu/views/papers/gale/20030506_mills.pdf
47Interestingly, prior to 1993, the tax code apparently created an incentive for a buyer ofintangible assets to convert “goodwill,” which was nondeductible, into deductible
intangible assets. At the same time, accountants were booking everything as “goodwill”
until FASB 141 and 142 changed the requirements. See The Private Equity Network.
Asset or Stock Sale.
http://www.nvst.com/resources/financeknowledge/pnvFKtutraset.asp
48

Internal Revenue Service. Intangibles.
http://www.irs.gov/businesses/small/article/0,,id=110440,00.html
49

Chapter 9: Amortization. In Business Expenses. Publication 535, Internal Revenue
Service.

Intangible Asset Monetization – Athena Alliance102

http://www.irs.gov/publications/p535/ch09.html#d0e7395
50

U.S. Department of the Treasury, Office of Public Affairs. Treasury Issues
Capitalization Guidance. Dec. 22, 2003.
http://www.treas.gov/press/releases/js1062.htm
51

Faussett, N. Capitalizing Intangible Assets: Final Regulations. BNA Software.
http://www.bnasoftware.com/media_library/knowledgecenter/ExpertCenter_fx/Capitalizi
ng_Intangibles-Finals_Regs.pdf
Singer, S. A. Capitalization of Intangible Assets. DiGiovine, Hnilo, Jordan, and Johnson,
Ltd.
http://www.dhjj.com/News/Capitalization%20of%20Intangible%20Assets.pdf
52

Feinschreiber, R., and M. Kent. Understanding the Capitalization Regulations. Council
for International Tax Education, March 6, 2003.
http://www.citeusa.org/articles/CapReg.htm
53

Sloan, A. J& J’s Advantage in Pfizer Purchase: Taxes. Washington Post, Aug. 8, 2006,
p. D02.
http://www.washingtonpost.com/wpdyn/content/article/2006/08/07/AR2006080701112.html
Also, Doherty, J. J&J’s Pfizer Deal Is No Elixir. Barrons, July 1, 2006.
http://www.newratings.com/analyst_news/article_1309559.html
54

Congressional Budget Office. Federal Support for Research and Development.
Congress of the United States, Washington, D.C., June 2007, p. 28.
http://www.cbo.gov/ftpdocs/82xx/doc8221/06-18-Research.pdf
55

Treasury Conference on Business Taxation and Global Competitiveness: Background
Paper. U.S. Department of the Treasury, July 23, 2007, p. 27.
http://www.treas.gov/press/releases/reports/07230%20r.pdf
56

Federal Support for Research and Development, op. cit., pp. 23–28.

57

Treasury Conference on Business Taxation and Global Competitiveness: Background
Paper, op. cit., p. 29.

58

Tax Benefits for Education, Publication 970. Internal Revenue Service.
http://www.irs.gov/pub/irs-pdf/p970.pdf
59

Fisher, P. IP Owners Ignore Tax Issues at Their Peril. Intellectual Asset Management,
October/November 2005, p. 37.
http://www.iam-magazine.com

Intangible Asset Monetization – Athena Alliance

103

60

Simpson, G. R. Irish Subsidiary Lets Microsoft Slash Taxes in United States andEurope. Wall Street Journal, Nov. 7, 2005.
http://online.wsj.com/article/SB113132761685289706.html
Also, U.S. Multinationals Overseas Profits: Ireland’s Patent Income Tax-Exemption May
Fund Over 5% of Irish Government Annual Spending in 2006. FinFacts, Jan. 18, 2005.
http://www.finfacts.com/irelandbusinessnews/publish/article_10003995.shtml
61

Browing, L. The Netherlands, the New Tax Shelter Hot Spot. New York Times, Feb. 4,2007.
http://www.nytimes.com/2007/02/04/business/yourmoney/04amster.html
62

Lowtax.net. Netherlands: Royalty Conduit Companies.
www.lowtax.net/lowtax/html/offon/netherlands/netroy.html
63

See http://www.algoodbody.ie/news/load.asp?file=PUB:1063.

64

Byrne, N. A Patently Obvious Mistake? SiliconRepublic.com, April 26,
2007.
http://www.siliconrepublic.com/news/news.nv?storyid=single8217
65

Simpson, op. cit.

66

Tax Information for International Businesses: Transfer Pricing. Internal Revenue
Service.
http://www.irs.gov/businesses/international/article/0,,id=120220,00.html
67

Cole, R. T. Advice to the Candidate on International Taxation. BNA Tax Management,
2004.
http://www.bnatax.com/tm/insights_Reform.htm
68

Sullivan, M. A. As quoted in Big Pharma and Shifting Profits to Reduce Taxes. Angry
Bear, Aug. 16, 2006.
http://angrybear.blogspot.com/2006/08/big-pharma-and-shifting-profits-to.html
69

Burns, P. B. International Implications of the Services Cost Method of the New U.S.
Transfer Pricing Regulations. In IP Value 2007: Building and Enforcing Intellectual
Property Value. An International Guide for the Boardroom. Globe White Page, 2007.
http://www.buildingipvalue.com/07KTI/p.63-66%20Duff%20Phelps.pdf
70

Written Testimony of Commissioner of Internal Revenue Mark Everson before Senate
Committee on Homeland Security and Governmental Affairs’ Permanent Subcommittee
on Investigations, Hearing on Offshore Abuses: The Enablers, the Tools, and Offshore
Secrecy, Aug. 1, 2006, p. 3.

Intangible Asset Monetization – Athena Alliance104

http://hsgac.senate.gov/_files/STMTEversonIRS.pdf
Written Testimony of Commissioner of Internal Revenue Mark Everson before Senate
Committee on Finance on Compliance Concerns Relative to Large and Mid-SizeBusinesses, June 13, 2006, p. 6.
http://www.senate.gov/~finance/hearings/testimony/2005test/061306testme.pdf
71

Industry Director Directive #1 on Transfer of Intangibles Offshore/§482 Cost Sharing
Buy-In Payment. Memorandum from Patricia C. Chaback, Industry Director,
Communications, Technology, and Media, LMSB Control No: LMSB–04–0307–02,
Impacted IRM 4.51.5, April 5, 2007.
http://www.irs.gov/businesses/article/0,,id=169313,00.html
72

Hardgrove, M., and A. Voloshko. IP Migration: What the Fuss Is About. Building and
Enforcing Intellectual Property Value: An International Guide for the Boardroom. GlobeWhite Page, 2003.
http://www.buildingipvalue.com/taxation/hardgrove.html
73

Heiman, L. Laws Relating to Property Tax Exemptions, Special Rates, and Incentives.
Montana Legislative Services, Sept. 11, 2003, p. 13.
http://mt.gov/revenue/legislativeinformation/propertyexemption/lawsrelatingtoptspecialra
tesandincentives.doc
74

2007 Personal Property Tax Forms and Instructions. Commonwealth of Kentucky,
Department of Revenue, p. 5.
http://www.revenue.ky.gov/NR/rdonlyres/A4F5DD3B-989D-4230-A5F6A542B57737A9/0/62A500Book.pdf
75

Delaware Intangible Holding Companies. Buchanan Ingersoll & Rooney, June 8,2004.
http://www.bipc.com/news.cfm?mode=article&article_id=1019&practice_id=976

Stansky, L. Tax Turf War. The National Law Journal, Jan. 26, 2004.
http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1074819304760
77

Bureau of National Affairs. 2006 Survey of State Tax Department, p. 71.
http://www.bna.com/states/statesurvey/2006survey.pdf
78

KeyState Corporate Management. Establishing Substance in Nevada/Delaware.
http://www.nevhold.com/domicile/substance.html
79

See Stansky, op. cit.

80

Geoffrey, Inc. v. Oklahoma Tax Commission (March 29, 2006).

Intangible Asset Monetization – Athena Alliance105

See Grant Thornton State & Local Tax Alert, The Oklahoma Geoffrey Decision: Another
Nail in the Licensing Coffin? April 17, 2006.
http://www.grantthornton.com/staticfiles/GTCom/files/services/TaxServices/SALT%20A
lerts/SALT%20Alert%204-17-06%20OK.pdf
81

Lanco, Inc. v. Director, Division of Taxation (Oct 2006).
See State Tax Alert: New Jersey Supreme Court Holds Physical Presence Principle
Inapplicable for Business Corporation Tax Purposes. Miller & Chevalier Tax
Controversy Alert, Vol. 8, No. 11, Oct. 20, 2006.
http://www.millerchevalier.com/files/upload/Tax%20Controversy%20Alert%20%5BStat
e%20Tax%5D%20October%2020%202006.pdf
82

Tax Comm’r of the State of W. Va. v. MBNA America Bank N.A. (Nov. 21, 2006).
See Legal Alert: West Virginia Supreme Court Rejects Physical Presence, Applies“Significant Economic Presence” Nexus Standard in MBNA America Bank. Sutherland
Asbill & Brennan LLP, Nov. 22, 2006.
http://www.sablaw.com/files/tbl_s10News%5CFileUpload44%5C16202%5CLegalAlert
WVASupremeCourtRejectsPhysicalPresence112206.pdf
83

Mazerov, M. Closing Three Common Corporate Income Tax Loopholes Could Raise
Additional Revenue for Many States. Center on Budget and Policy Priorities, Washington,
D.C., May 23, 2003.
http://www.cbpp.org/4-9-02sfp.pdf
84

See Mullins, B. Music to Songwriters’ Ears: Lower Taxes. Wall Street Journal, Nov.
29, 2005.
http://online.wsj.com/article/SB113322576138408618.html
85

Byrne, op. cit.

86

Constitution of the United States of America, Article I, Section 8.
http://www.law.cornell.edu/constitution/constitution.articlei.html#section8
87

See http://www.thomsonscientific.com/support/patents/patinf/patentfaqs/history.

88

FindLaw. Clause 8, Copyrights and Patents.
http://caselaw.lp.findlaw.com/data/constitution/article01/39.html
89

Manual of Patent Examining Procedure, Appendix L: Patent Laws. United States
Patent and Trademark Office, August 2006.
http://www.uspto.gov/web/offices/pac/mpep/documents/appxl.htm
90Note that the issue of remedies is the subject of current discussion. Various pieces oflegislation have been proposed to modify the nature and severity of the remedies. In

Intangible Asset Monetization – Athena Alliance106

addition, a number of recent Supreme Court cases have changed important features, suchas ending mandatory injunction.
91

The specifics of this clause were modified by a recent Supreme Court case, Microsoft
Corp. v. ATT Corp. (April 30, 2007), No. 05–1056.
http://www.supremecourtus.gov/opinions/06pdf/05-1056.pdf
92

See USTR Focus on Intellectual Property and Innovation. Office of the United States
Trade Representative (USTR).
http://www.ustr.gov/Trade_Sectors/Intellectual_Property/Section_Index.html
93Kanter, J., and G. Rivlin. WTO Gives Antigua Right to Violate U.S. Copyrights in
Gambling Dispute. International Herald Tribune, December 21, 2007.
http://www.iht.com/articles/2007/12/21/business/wto.php
94

BitLaw. PCT Patents and Other International Patents.
http://www.bitlaw.com/patent/international.html
95

BitLaw. Patent Cooperation Treaty.
http://www.bitlaw.com/source/treaties/pct.html
96

For example, Jaffe, A. B., and J. Lerner. Innovation and Its Discontents: How Our
Broken Patent System Is Endangering Innovation and Progress, and What to Do About
It. Princeton University Press, Princeton, N.J., 2004.
97

For example, the Microsoft v. Alcatel-Lucent case hinges on who actually owns two of
the basic patents to the MP3 technology. Microsoft (and 400 other companies) licensed
the technology from one entity, but Alcatel–Lucent claims the patents are theirs. See
Sipress, A. and M. Musgrove. MP3 Patent Verdict Harmless to Music Fans—For Now.
Washington Post, Feb. 24, 2007, p. D1.
http://www.washingtonpost.com/wpdyn/content/article/2007/02/23/AR2007022301847.html
98§102 Title 17 of the United States Code.
http://www.copyright.gov/title17/92chap1.html#102
99

Copyright Office Basics. Circular 1., U.S. Copyright Office, The Library of Congress,
July 2006.
http://www.copyright.gov/circs/circ1.html#wci
100

For a more complete discussion, see Fair Use on Wikipedia.
http://en.wikipedia.org/wiki/Fair_use
For an interesting comic book version explanation, see Aoki, K., J. Boyle, and J. Jenkins.
Bound by Law? Tales from the Public Domain. Center for the Study of the Public
Domain, Duke University, 2006.

Intangible Asset Monetization – Athena Alliance107

http://www.law.duke.edu/cspd/comics(See also Presema, F. Fair Use Follies. Duke Law Magazine, Volume 24, Number 2, Fall2006.
http://www.law.duke.edu/magazine/2006fall/features).
For a discussion of the $4.5 trillion annual revenues generated by the fair-use dependent
industries, see Rogers, T. and A. Szamosszegi. Fair Use in the U. S.
Economy: Economic Contribution of Industries Relying on Fair Use. Computer andCommunications Industry Association, September 2007.
http://www.ccianet.org/artmanager/uploads/1/FairUseStudy-Sep12.pdf
101Creative Commons. Learn More About Creative Commons.
http://creativecommons.org/learnmore
102

The Free Software Foundation.
http://www.fsf.org
Open Source Initiative.http://opensource.org
103

The GNU Operating System. Licenses.
http://www.gnu.org/licenses/licenses.html
104International Copyright Relations of the United States. Circular 38a. U.S. Copyright
Office, The Library of Congress, June 2004.
http://www.copyright.gov/circs/circ38a.html
105What Is a Trademark or Service Mark? United States Patent and Trademark Office,November 2004.
http://www.uspto.gov/web/offices/tac/doc/basic/trade_defin.htm
106

See http://en.wikipedia.org/wiki/Trademark.

107

Trademark Manual of Examination Procedures (TMEP), 4th ed. United States Patent
and Trademark Office, April 29, 2005.
http://tess2.uspto.gov/tmdb/tmep
108

Quinn, Jr., E. R. Introduction to U.S. Trade Secret Law. IPWatchdog
http://www.ipwatchdog.com/tradesecret.html
109

Biswas, S. J. The Economic Espionage Act of 1996. Myers Bigel Sibley & Sajoves,
P.A., Raleigh, N.C.
http://www.myersbigel.com/ts_articles/trade_secret4.htm
110Intellectual Property Cases, Computer Crime & Intellectual Property Section, UnitedStates Department of Justice.
http://www.cybercrime.gov/ipcases.html#eea

Intangible Asset Monetization – Athena Alliance

108

111

National Conference of Commissioners on Uniform State Laws. Uniform Trade
Secrets Act (with 1985 Amendments), Section 1, paragraph 4.
http://www.law.upenn.edu/bll/ulc/fnact99/1980s/utsa85.htm
112

Trade Secrets: Knowing When Not to Tell. Workman Nydegger.
http://www.wnlaw.com/?id=Mjk2
113

Halligan and Weyand, Trade Secret Asset Management, op. cit., p. 14.

114

Ibid, pp. 26–58.

115

Pooley, J. Update on Trade Secret Law. ipFrontline.com, Monday, Dec. 11, 2006.
http://www.ipfrontline.com/depts/article.asp?id=13607&deptid=4116

Schacht, W. H. Technology Transfer: Use of Federally Funded Research andDevelopment. Resources, Science, and Industry Division, Congressional ResearchService, Feb. 10, 2006.
http://digital.library.unt.edu/govdocs/crs//data/2006/upl-meta-crs8454/IB85031_2006Feb10.pdf
The Bayh–Dole Act: Selected Issues in Patent Policy and the Commercialization ofTechnology. Resources, Science, and Industry Division, Congressional Research Service,
Dec. 8, 2006.
http://fpc.state.gov/documents/organization/79343.pdf
117

See http://www.wto.org/english/docs_e/legal_e/ursum_e.htm#nAgreement.

118

World Trade Organization. Index of Disputes Issues.
http://www.wto.org/english/tratop_e/dispu_e/dispu_subjects_index_e.htm#trips
119

World Intellectual Property Organization. Core Tasks of WIPO.
http://www.wipo.int/about-wipo/en/core_tasks.html
120

To Promote Innovation: The Proper Balance of Competition and Patent Law and
Policy. Federal Trade Commission, October 2003.
http://www.ftc.gov/os/2003/10/innovationrpt.pdf
121

Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation andCompetition. U.S. Department of Justice and the Federal Trade Commission, April 2007.
http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf
122

Antitrust Guidelines for the Licensing of Intellectual Property. U.S. Department ofJustice and the Federal Trade Commission, April 6, 1995.

Intangible Asset Monetization – Athena Alliance109

http://www.ftc.gov/bc/0558.pdf
123Lagace, M. The Power of the Noncompete Clause: A Q&A with Matt Marx. HBS
Working Knowledge, Feb. 26, 2007.
http://hbswk.hbs.edu/item/5628.html
124

Klingshirn, N. E. Noncompete Agreement FAQs. My Employment Lawyer.
http://www.myemploymentlawyer.com/non-compete-covenant-FAQs.htm
125

Marx, M., D. Strumsky, and L. Fleming. Noncompetes and Inventor Mobility:
Specialists, Stars, and the Michigan Experiment. HBS Working Paper 07–042, Harvard
Business School, January 2007.
http://hbswk.hbs.edu/item/5624.html
126

According to Wikipedia:
A security interest is a property interest created by agreement or by operation of law overassets to secure the performance of an obligation (usually but not always the payment ofa debt)[,] which gives the beneficiary of the security interest certain preferential rights inrelation to the assets. The rights vary according to the type of security interest, but inmost cases (and in most countries) the main rights and purpose of the security interest is
to allow the holder to seize, and usually sell, the property to discharge the debt that the
security interest secures.
http://en.wikipedia.org/wiki/Security_interest
127

See http://www.sos.state.tx.us/ucc/index.shtml.

128

Kavanaugh, M. W., and F. Bahar. Uniform Commercial Code Revised Article 9: A
Brave New World? Points & Authorities, Buchalter, Nemer, Fields & Younger, Fall
2001.
129

Schwarcz, S. L. The Impact on Securitization of Revised UCC Article 9. Global
Capital Markets Center, Chicago–Kent College of Law, 1999.
130

Murphy, W. J. A Proposal for a Centralized and Integrated Registry for Security
Interest in Intellectual Property. IDEA: The Journal of Law and Technology, Vol. 41, No.
3 & 4, 2002, p. 297.
http://www.idea.piercelaw.edu/articles/41/#anchor
131

For example, see Peterka, K., and R. P. Ormond, op.cit., andSilvia, D. J. Perfecting Security Interests in Intellectual Property in an Imperfect World.
Edwards & Angell Intellectual Property Bulletin, Spring 2004.
http://www.eapdlaw.com/files/News/6e531d7f-f620-4c8b-927d66c89231997d/Presentation/NewsAttachment/a30095dc-c8e1-4dd9-b167672a257284c4/media.207.pdf

Intangible Asset Monetization – Athena Alliance

132

110

Murphy, op. cit., p. 300.

133

Borod, R. S., and T. J. Cassidy. Clearing the Hurdles for IP Securitization in the
United States. Intellectual Asset Management, October/November 2005, p. 57.
http://www.iam-magazine.com
134

Liquor License Lien—Short Lived Victory. New Jersey Law Blog, May 6, 2005.
http://www.njlawblog.com/2005/05/articles/bankruptcy-creditors-rights/liquor-licenselienshort-lived-victory
135

Girton, Oakes & Burger, Inc. v. William Sayavich. June 22, 2005.
Bankruptcy Appellate Panel of the Sixth Circuit, File Name: 05b0007n.06. No. 04–8052.
http://www.ca6.uscourts.gov/opinions.pdf/05b0007n-06.pdf
136

Morrow, et al. v. Microsoft, United States Court of Appeals for the Federal Circuit,
2006–1512, –1518, –1537.
http://www.fedcir.gov/opinions/06-1512.pdf
137

Securities and Exchange Commission. Asset-Backed Securities. Final Rule. 17 C.F.R.,
Parts 210, 228, et al., Federal Register, Vol. 70, No. 5, Jan. 7, 2005, pp. 1508–1631.
http://www.sec.gov/rules/final/33-8518fr.pdf
138

For examples, see: Fitch: Regulation AB A Positive, But Not Without Growing Pains
for U.S. SF Issuers. Fitch Ratings, April 19, 2005.
http://www.americansecuritization.com/docs/fitch_on_issuers_and_reg_ab.pdf
Seelig, M., D. M. Lukach, and T. Knox. Understanding Regulation AB.
PriceWaterhouseCoopers, 2005.
http://www.pwc.com/Extweb/pwcpublications.nsf/docid/45C3D32B50D85A408525703E
005EAE9B/$File/051070regabv2.pdf
Regulation AB Puts Financial Institutions’ Feet to the Fire; Firms Need Experts to Help
Them Achieve Full Compliance. Business Wire, Aug. 7, 2006.
http://findarticles.com/p/articles/mi_m0EIN/is_2006_August_7/ai_n16609836/pg_1
139

Risk-Based Capital Standards: Advanced Capital Adequacy Framework. Office of theComptroller of the Currency, Department of the Treasury; Board of Governors of theFederal Reserve System; Federal Deposit Insurance Corporation; and Office of Thrift
Supervision, Department of the Treasury; March 20, 2006.
http://www.federalreserve.gov/generalinfo/basel2/DraftNPR/NPR
Federal Reserve Press Release, November 2, 2007.
http://www.federalreserve.gov/newsevents/press/bcreg/5963B9C381624605B116649904
087ECF.htm
140

Small Business Administration. Basic 7(a) Loan Program.
http://www.sba.gov/services/financialassistance/sbaloantopics/7a/index.html

Intangible Asset Monetization – Athena Alliance

111

141

Small Business Administration. CDC/504 Program.
http://www.sba.gov/services/financialassistance/sbaloantopics/cdc504/index.html
142

For example, the issue of fair use, mentioned earlier, is a major concern for university
teaching and for filming making. For example, see Fair Use of Copyrighted Materials.
The University of Texas System.
http://www.utsystem.edu/OGC/intellectualProperty/copypol2.htm
Aoki, et al., op.cit.
See also Lessig, L. Copyright Policy: Orphan Works Reform.
http://lessig.org/blog/2007/02/copyright_policy_orphan_works.html
143

Ballow, J. J., R. J. Thomas, and G. Roos. Future Value: The $7 Trillion Challenge.
Journal of Applied Corporate Finance, Vol. 16–1, 2004.
http://www.accenture.com/Global/Research_and_Insights/By_Subject/Corporate_Strateg
y/FutureChallenge.htm
144

Cardoza, K., J. Basara, L. Cooper, and R. Conroy. The Power of Intangible Assets: An
Analysis of the S&P 500. OceanTomo, January 2006.
http://www.icknowledgecenter.com/WhitePapers/OceanTomoS&P500.pdf
145

For an overview of the argument, see Laitner, J. and D. Stolyarov. Technological
Change and the Stock Market. American Economic Review, Vol. 93, No. 4, 2003, pp.
1240–67. Wright, S. Tobin’s q and Intangible Assets. Working Paper, Birkbeck School of
Economics, Mathematics, and Statistics, April 4, 2006.
http://www.ems.bbk.ac.uk/faculty/wright/pdf/TobinsQIntangibleAssets
146

Design Index: The Impact of Design on Stock Market Performance. Design Council,
London, December 2004.
http://www.designcouncil.org.uk/en/About-Design/Research/Design-Index
Jarboe, K. P. U.K. Leads; U.S. Lags. Manufacturing & Technology News, July 8, 2005.
http://www.athenaalliance.org/apapers/UKleads.html
147

What Price Reputation? Business Week, July 9, 2007.
http://www.businessweek.com/magazine/content/07_28/b4042050.htm
148

Choi, W. W., S. S. Kwon, and G. J. Lobo. Market Valuation of Intangible Assets.
Journal of Business Research, Vol. 49, 2000, pp. 35–45.
149

Hall, R.E. Struggling to Understand the Stock Market. American Economic Review
Papers and Proceedings, Vol. 91, No. 2, 2001, pp. 1–11.

150

Ibid.

Intangible Asset Monetization – Athena Alliance

112

151

Zhang, D. Intangible Assets and Stock Trading Strategies. Managerial Finance, Vol.
29, No. 10, 2003, pp. 38–56.

152

Presentation by Goldman, B., Charles Rivers Associates, as reported in Wild, Joff.
Welcome to the IP Century. In IP Value 2007: Building and Enforcing Intellectual
Property Value. An International Guide for the Boardroom. Globe White Page, 2007, pp.
11–12.
http://www.buildingipvalue.com/07intro/p.10-12%20Joff’s%20Intro.pdf
153

Sterne, R. G., and R. Laurie. Integrating IP Value Assessment into Early-Stage M&A
Activity. In IP Value 2007: Building and Enforcing Intellectual Property Value. An
International Guide for the Boardroom. Globe White Page, 2007, pp. 123–126.
http://www.buildingipvalue.com/07US_Can/p.123-126%20Sterne%20Kessler.pdf
154

Kobylarz, X. P. Diligence Pays Off: Vetting Intellectual Property for M&A Work is
an Increasingly Hot Specialty. IP Law and Business, Vol. 4, No. 10, October 2006, pp.
20–23.
http://www.law.com/jsp/article.jsp?id=1156943796152
155

Ocean Tomo and Blueprint Ventures Create Alliance to Unlock Intellectual Property
Value Inside Corporations. Marketwire, February 4, 2008.
http://money.cnn.com/news/newsfeeds/articles/marketwire/0356101.htm
156

Lamoreaux and Sokoloff, op. cit.

157

Kamiyama, S., J. Sheehan, and C. Martinez. Valuation and Exploitation of Intellectual
Property. STI Working Paper 2006/5, Statistical Analysis of Science, Technology, andIndustry, Organization for Economic Cooperation and Development, Paris, June 30,
2006, Table 3, p. 12.
http://www.oecd.org/dataoecd/62/52/37031481.pdf
158

Halligan, R. M. Trade Secret Licensing: The “Listerine” Formula Case, 1998.
http://my.execpc.com/~mhallign/license.html
159

Malackowski, J. The Intellectual Property Marketplace:
Past, Present, and Future. John Marshall Review of Intellectual Property Law, Vol. 5, No.
4, Summer 2006, p. 606.
http://www.jmripl.com/Publications/Vol5/Issue4/Malackowski.pdf
160

For a description of a number of IP value extraction mechanisms, see Henning, S.
Internal Operations to Leverage IP Assets. In Business Power: Creating New Wealthfrom IP Assets (R. Shearer, ed.), John Wiley & Sons, Hoboken, N.J., 2007, p. 206.

161

See Charitable Contributions. Publication 526. Internal Revenue Service.
http://www.irs.gov/pub/irs-pdf/p526.pdf

Intangible Asset Monetization – Athena Alliance

113

162

Abril, P. S., and R. Plant. The Patent Holder’s Dilemma: Buy, Sell, or Troll.
Communications of the ACM, Vol. 50, No. 1, 2007, pp. 37–44.

163

Mann, E. CIF Brings Innovative Thinking and Resources to Their Customers. The
Financing Answer, Vol. 2, July 2005.
https://www.cefcorp.com/commequip/toolsandresources/fajuly2005.pdf
LES 2005 Deals of Distinction Awards Announced: GE and Motorola Win the HighTechnology Sector Award. PRNewswire, Oct. 18, 2005.
http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/10-182005/0004172030&EDATE164

For examples, see Inflexion Point Strategy, http://www.ip-strategy.com,
Center for Advanced Technology and Innovation, http://www.thecati.com,
and Yets.com, http://www.yet2.com.

165

See http://www.ip-marketplace.org.

166

See http://www.ipauctions.com and http://www.freepatentauction.com.

167

See http://www.oceantomo.com.

168

See http://www.royaltypharma.com/media/corpbroch.pdf.

169

See
http://www.royaltypharma.com/media/documents/GileadSciencesandRoyaltyPharmaAnn
ounce525MillionAgreementwithEmoryUniversitytoPurchaseRoyalt.pdf.
Emory Drug Deal Turns Heads. Investment Dealers’ Digest, Jan. 26, 2006.
http://www.royaltypharma.com/media/documents/EmoryDrugDealTurnsHeadsInvestmentDealersDigest011606_002.pdf
170

See http://www.royaltypharma.com/media/documents/HumiraPressreleasefinal.pdf.

171

See http://www.symphonycapital.com.

172

Dalal, Y., and S. Orn. Examining an Innovative Financing Alternative for Stage
Biotechs. Kellogg School of Management, Northwestern University, 2006.
http://www.kellogg.northwestern.edu/academic/biotech/articles/financing_alternative.PD
F
173

Sullivan, J. Aggressive IP Strategies Open Up New Revenue Streams. Intellectual
Asset Management, October/November 2005, p. 27.
www.iam-magazine.com

Intangible Asset Monetization – Athena Alliance

114

174

Intellectual Property Enterprise Zone & Intellectual Property Exchange, Chicago.
Ocean Tomo.
http://www.oceantomo.com/ipez.html
175

Ibid.

176

See http://www.m-cam.com/financial.

177

See http://www.km-iptask.org/competencies_standards.html.

178

Hall, M. Measures to Increase the Effectiveness of Credit Risk Analysis in Corporate
Lending Through a Better Understanding of the Role of Intangibles. Policy Research into
Innovation and Measurement (PRISM) Work Package 7, May 2003, p 5.
http://www.euintangibles.net/library/localfiles/WP7/7.1_Hall_2003.pdf
179

See http://www.consor.com/sec_page.asp?page_idno=34728

180

Venkatachalam, A. R. Use of Patents in Securing Financing: A Survey of New
England Firms. Enterprise Integration Research Center, University of New Hampshire,
September, 2007.
http://wsbe2.unh.edu/files/Survey_Summary_FINAL.pdf
181

Blair, M. M., and S. M. H. Wallman. Unseen Wealth: Report of the Brookings Task
Force on Intangibles. Brookings Institution Press, Washington, D.C., 2001, p. 88.

182

One could argue that this is using the intangible of social obligations as collateral. See
Joint Liability as Loan Collateral.
http://opus1journal.org/articles/article.asp?docID=68.
See also Grameen Bank
http://www.grameen-info.org
183

Leeds, J., and A. R. Sorkin. Bailout of Jackson Expected. New York Times, April 13,
2006, p. C–1.

184

Thomson Media, Bank Loan Report. Vol. 20, No. 6, Feb. 14, 2005.
http://www.pullmanbonds.com/BankReport.pdf
185Benz, M. Bowie Bonds: One-Off or a Sound Vision for the Future. Billboard, June 20,
2001.
http://www.pullmanco.com/article136.htm
186

See http://www.royaltyadvance.com.

187

See http://www.contentllc.com.

Intangible Asset Monetization – Athena Alliance

188

Mosk, M., and S. Cohen. With Crucial Loan, McCain Put His Bid Back in the Black.
Washington Post, Feb. 1, 2008, Page A01.
http://www.washingtonpost.com/wpdyn/content/article/2008/01/31/AR2008013103921.html
189

UCC Capital Corporation. IP Innovator. Vol. 2, No. 4, November 2004.

190

Bergelt, K., and E. Meintzer. IP Collateralization in Perspective. Intellectual AssetManagement, October/November 2005, pp. 69–72.
http://www.iam-magazine.com
191

Edwards, D. Patent Backed Securitization: Blueprint for a New Asset Class. Gerling
NCM Credit Insurance, 2002.
http://www.securitizatn.net/pdf/gerling_new_0302.pdf
192

IP Innovations. Wise and Cheez Doodles Are Among Assets that Collateralize Loan
for Leading U.S. Snack Company. Press Release, Oct. 5, 2004.

193

IP Innovations. Lloyd’s TSB Is Providing Loan Facility to UK-Based CDT. Press
Release, Sept. 30, 2004.

194

Anson, W. Valuing IP Assets in Bankruptcy. IPL Newsletter, Vol. 21, No. 2, Winter2003.
http://www.abanet.org/intelprop/bulletin/winter_03.pdf
195

Eustace, C. G. Intellectual Property and the Capital Markets. City University
Business School: Working Papers Series, July 2000.
196

Ibid.

197

Kamiyama, Sheehan, and Martinez, op. cit., p. 20.
http://www.oecd.org/dataoecd/62/52/37031481.pdf
198

Securities and Exchange Commission. Asset-Backed Securities, op. cit.

199

Davies, P. J. Banks Profit from Asset-Backed Securities. Financial Times of London,
June 3, 2007.
http://www.ft.com/cms/s/2c2599f8-11f0-11dc-b963-000b5df10621.html
200

BMO Capital Markets. Asset Classes.
http://www.bmocm.com/products/investment/securitization/usa/asset/default.aspx
201

White, B. Wall Street Lends Its Style to Artists in Need of Funds. Washington Post,
June 30, 2004, Page A01.
http://www.washingtonpost.com/wp-dyn/articles/A16045-2004Jun29.html

115

Intangible Asset Monetization – Athena Alliance

116

202

Note that the Bowie Bonds were later downgraded and that according to Hillery, theissuance of music-based bonds has stagnated. See Hillery, J. S. Securitization ofIntellectual Property: Recent Trends from the United States. Washington CORE, March2004.
http://www.iip.or.jp/summary/pdf/WCORE2004s.pdf
203

The deal later defaulted and Royalty Pharma resecuritized the patent as part of a set of
13 patents. See Hillery, ibid.

204

Monga, V. Soft Assets and Hard Cash. The Deal.com, March 11, 2005.
http://www.pullmanco.com/softassets.htm
205

Flow of Funds Accounts of the United States: Flows and Outstandings Fourth Quarter2006. Release Z.1. Board of Governors of the Federal Reserve System, Washington D.C.,
March 8, 2007.
http://www.federalreserve.gov/RELEASES/z1/Current/z1.pdf
206

Eisbruck, J. Royal(ty) Succession: The Evolution of IP-Backed Securitisation. In IP
Value 2007: Building and Enforcing Intellectual Property Value. An International Guide
for the Boardroom. Globe White Page, 2007, pp. 17.
http://www.buildingipvalue.com/07intro/p.17-21%20Intro,%20Moody.pdf
207

DCR Comments on Music Royalty Securitizations. Special Report, Duff & Phelps
Credit Rating Co., September 1999.
http://pages.stern.nyu.edu/~igiddy/ABS/music.pdf
208

Wallace, A. Whatever Happened to the Rock Exchange? Portfolio.com, April 23,
2007.
http://www.portfolio.com/culture-lifestyle/culture-inc/arts/2007/04/23/Rock-Exchange
209

Ashton, J., and D. Rushe. Trouble at EMI. Sunday Times, January 13, 2008.
http://business.timesonline.co.uk/tol/business/industry_sectors/media/article3176868.ece
210

211

Hillery, op. cit., Eisbruck (2007), op. cit.

Rosenberg, F., and T. Rozier-Boyd. Securitizing IP Assets in the Film Industry.
International Securitization & Finance Report, Vol. 9, No. 20, Nov. 15, 2006.
http://www.brownrudnick.com/nr/pdf/articles/REPRINT_Structured_Finance_Securitizin
g_IP_Assets_in_Film_Industry_International_Securitization_Report_Rosenberg__Fred_1
106.pdf

Intangible Asset Monetization – Athena Alliance

117

212

Unmack, N. Box-Office Bonds Bet on Blockbusters: Morgan Stanley Fund to Let
Investors Profit When Movies Do. Bloomberg News, as published in the Washington
Post, Tuesday, June 5, 2007, page D02.
http://www.washingtonpost.com/wpdyn/content/article/2007/06/04/AR2007060401761.html
213

Waxman, S. Marvel Wants to Flex Its Own Heroic Muscles as a Moviemaker. New
York Times, June 18, 2007.
http://www.nytimes.com/2007/06/18/business/media/18marvel.html
214

Lauria, P. ‘Cruisen’ Again: Backers Give Tom $500m in Financing. New York Post,
July 29, 2007.
http://www.nypost.com/seven/07292007/business/cruisen_again_business_peter_lauria.htm215

For overviews, see Monga, op.cit., Hillery, op. cit., Eisbruck (2007), op.cit., andMahmud, S. Securitizing for the Future. Managing Intellectual Property, September
2006.
http://www.managingip.com/includes/magazine/PRINT.asp?SID=648439&ISS=22412&
PUBID=34
Leone, M. The Whole Truth. CFO.com. April 15, 2004.
http://www.cfo.com/article.cfm/3012345/c_3666324?f=singlepage
216

Eisbruck (2007), op. cit.

217

Berner, R. The New Alchemy at Sears. Business Week, April 16, 2007.
http://www.businessweek.com/magazine/content/07_16/b4030071.htm
Ocean Tomo. Ocean Tomo Appointed as Back-Up IP Manager for $1.8 Billion
Trademark Royalty Rights Securitization. Press Release, May 25, 2006.
http://www.oceantomo.com/press/KCD_IP_5.25.06.pdf
218

Domino’s Pizza Master Issuer LLC, Series 2007–1 Asset Backed Notes. Moody’s,
March 22, 2007.
http://www.moodys.com/moodys/cust/research/MDCdocs/09/2006600000434131.PDF
219

Halligan and Weyand, Trade Secret Asset Management, op. cit., argue that a similar
structure can be used for trade secrets as well. However, to date, the creation of suchtrade-secret holding companies remains just an intriguing idea.

220

Hillery, op. cit.

221

Ibid.

222

See http://www.royaltypharma.com/overview/capabilities.html.

Intangible Asset Monetization – Athena Alliance

118

223

Financial Innovations for Accelerating Medical Solutions. Financial Innovations Lab
Report, Milken Institute, October 2006.
http://www.milkeninstitute.org/publications/publications.taf?function=detail&ID=580&c
at=finlab
224

Eisbruck (2007), op. cit., p. 20.

225

Dorris, M. S., and L. M. Wilkes. Pharmaceutical Royalties: A New Securitization
Frontier. Intellectual Asset Management, October/November 2005, pp. 63–68.
226

Ibid.

227

Elliott, D. R. Asset-Backed IP Financing: Strategies for Capitalizing on Future
Returns. (B. M. Berman, ed.) From Ideas to Assets: Investing Wisely in Intellectual
Property, John Wiley & Sons, New York, 2002 and personal conversation with D. Elliott,
January 28, 2008.
228

Seyfer, J. Private Equity Helps Fuel IP Wars. The Recorder (San Francisco), June 28,2007.
http://www.law.com/jsp/article.jsp?id=1183021572654
229

Bain Capital, The Carlyle Group, and Thomas H. Lee Partners Complete Acquisitionof Dunkin’ Brands. Press Release, March 1, 2006.
https://www.dunkindonuts.com/aboutus/press/PressRelease.aspx?viewtype=current&id=
100070230

EMI Takeover Bids Send Stock Higher. CNN Money/Reuters, May 4, 2007.
http://money.cnn.com/2007/05/04/news/international/bc.emi.takeover.reut/index.htm
231

Ashton and Rushe, op. cit.

232

Guha, K., and E. Callan. Central Banks’ Dilemma over Information Deficit. Financial
Times, Aug. 16, 2007.
http://www.ft.com/cms/s/01ea9608-4c2d-11dc-b67f-0000779fd2ac.html
233

Eisbruck, J. H. Moody’s Approach to Rating Music Royalty and Intellectual PropertyBacked Transactions: There’s No Business Like Show Business. Moody’s, July 2, 1999.
http://www.moodys.com/moodys/cust/research/MDCdocs/18/117490.pdf
234

Del Bello, A. Credit Rating and Intangible Assets: Some Observations on Current
Practices. Paper developed for EU Prism Project, 2003.
http://www.euintangibles.net/library/localfiles/WP4/4.7_DelBello_2003.pdf

Intangible Asset Monetization – Athena Alliance

119

235

Kutscher, A. Prudential Investment’s Vice President for Structured Finance, as quoted
in Getting Secure, Katz, J. Regional Review, Federal Reserve Bank of Boston, Summer
1997.
http://www.bos.frb.org/economic/nerr/rr1997/summer/katz97_3.htm
236

Hyder, I. Collateralized Debt Obligations and the Role of Monoline Insurers. XL
Capital Assurance Inc.
http://www.scafg.com/xlca/upload/files/EuromoneyHandbook2003.pdf
237

Domino’s Pizza Master Issuer LLC, Series 2007–1 Asset Backed Notes, op. cit.

238

Criteria: U.S. Corporate Securitization Transactions. Standard & Poor’s, Oct. 24,
2006.

239

DB Master Finance LLC. Standard & Poor’s, May 16, 2006.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.article_print/2,1,9,1,114572
9905279.html
240

Bond Basics: Asset-Backed Securities. Pacific Investment Management Company
LLC (PIMCO), December 2005.
http://www.pimco.com/LeftNav/Bond+Basics/2006/ABS_Basics.htm
241

Eisbruck (1999), op. cit.

242Intellectual Property Enterprise Zone & Intellectual Property Exchange Chicago, op.

cit.
243

Walsh, P. Securitization of Intellectual Property—An Explosion Still Waiting toHappen? In IP Value 2006: Building and Enforcing Intellectual Property Value. An
International Guide for the Boardroom. Globe White Page, 2006, p. 34.
http://www.buildingipvalue.com/06intro/033_034.htm
244

For a more detailed discussion, see Jarboe, Reporting Intangibles, op. cit.

245

Securities and Exchange Commission. Interpretation: Commission Guidance
Regarding Management’s Discussion and Analysis of Financial Condition and
Results of Operations. 17 C.F.R., Parts 211, 231, and 241 [Release Nos. 33–8350;
34–48960; FR-72], Dec. 19, 2003.
http://www.sec.gov/rules/final/33-8350.htm
246

247

Malackowski, op. cit., p. 613.

See Anson, W., et al. Bundling and Grouping of Intangible Assets. In Fundamentals
of Intellectual Property Valuation. American Bar Association, Chicago, 2005.

Intangible Asset Monetization – Athena Alliance

120

248

As quoted in Are Patents an Asset Class? Intellectual Asset Management Magazine
blog, April 28, 2007.
http://www.iam-magazine.com/blog/Detail.aspx?g=41eb6f36-9028-4abd-bf446d0dd69c1e8d
Also, audio of session Intellectual Property and Intangible Assets: Growth of a New
Asset Class. Milken Institute Global Conference 2007, April 25, 2007.
http://www.milkeninstitute.org/events/gcprogram.taf?function=detail&EvID=1016&even
tid=gc07
249

Anson, W., Chairman of Consor Intellectual Asset Management, as quoted in Tilton,
Richard N. Bankruptcy Auctions of Intellectual Property, Jan. 16, 2002.
http://www.bankruptcy-acquisition.com/article_view.php?article_id=7250

See Halligan and Weyand, Trade Secret Asset Management, op. cit.

251

See http://global.marsh.com/risk/ip.

252

Grant, A. Ziggy Stardust Reborn: A Proposed Modification of the Bowie Bond.
Cardozo Law Review, Vol. 22, 2001, pp. 1291– 1314.
http://www.cardozo.yu.edu/cardlrev/pdf/223Grant.pdf
253

See http://www.infringeins.com, http://www.samian-underwriting.com,
http://global.marsh.com/risk/ip, and http://www.kilnplc.com.
254

Communications from Kimberly Klein Cauthorn, SAMIAN Underwriting Agencies
Limited, Jan. 8, 2008.
255

RepSure. Samian Underwriting.
http://www.samian-underwriting.com/repsure_us.html
256

Kiln 4Continuity: the intangible assets insurance solution.
http://www.4continuity.com/4front.asp
257First-Ever Open Source Compliance Insurance Now Available Through Partnership
Between London-Based Lloyd’s Underwriter Kiln, Lloyd’s broker Miller and Open
Source Risk Management. PRNewswire, Oct. 31, 2005.
http://www.prnewswire.co.uk/cgi/news/release?id=157178
258

Booth, G. Rethinking Risk. Managing Intellectual Property, Oct. 1, 2007.
http://www.managingip.com/Article.aspx?ArticleID=1445312&Title=Rethinking%20risk
259

Hyden, M., and M. Hogg. Practical Considerations for Insuring the Value of IP.
Intellectual Asset Management, Issue 8, December/January 2005.
http://www.4continuity.com/pdfs/4ContinuityIAMFinal.pdf

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260

Wilhelm, K., and J. Finnegan. Dawn of a New Asset Class. Intellectual AssetManagement, October/November 2005, p. 59.
http://www.iam-magazine.com
261

For a review, see Jarboe, Measuring Intangibles, op. cit.

262

For more detailed discussions, see Reilly, R. F., and R. P. Schweihs. Valuing
Intangible Assets. McGraw–Hill, New York, 1999.
Anson, W. et al. Fundamentals of Intellectual Property Valuation. American Bar
Association, Chicago, 2005.
For overviews, see Cotton, Spencer. IP Valuation & Intellectual Asset Management, Nov.
9, 2005.
http://www.proformance.com/portal_mojo/pcg/CUSTOM/UBC_FILES/Speaker_2005Sp
encer_Valuation.pdf
Upton, Ill., L. O. Intangible Asset Valuation, April 6, 2007
http://www.iic-inc.com/curr.intangible.shtml
263

Halligan, R. M., and R. F. Weyand. The Economic Valuation of Trade Secret Assets.
Journal of Internet Law, February 2006, p. 19.
http://www.thetso.com/Info/Journal%20of%20Internet%20Law%20Article.pdf
264

Sullivan, P. H., and R. McLean. The Confusing Task of Measuring Intangible
Value. Intellectual Asset Management, April/May 2007, pp. 36-41.
http://www.iam-magazine.com
265

As quoted in Bringardner, J. Good Measure? Patent Analytics Offers a New Tool for
Evaluating a Company’s Intangible Assets. But Will It Produce Tangible Results for
Investors? IP Law and Business, March 2007.
http://www.iplawandbusiness.law.com/display.php/file=/texts/0307/goodmeasure
266

Crouch, D. The Legacy of KSR v. Teleflex. Patently-O, May 3, 2007.
http://www.patentlyo.com/patent/2007/05/the_legacy_of_k.html
267

Private conversation, W. Anson, Consor Corporation, November 17, 2006.

268

Inkpen, A. C., and A. Madhok. The Valuation of Alliance Knowledge. In Valuation of
Intangible Assets in Global Operations (F. J. Contractor, ed.), Quorum Books, 2001, p.
52.

269

New valuation techniques may solve part of this problem. For example, Schwartz and
Bollmann argue for a decision-tree approach to valuation of IP in order to determine thepotential value of a patent. Such an approach takes into account management options aswell as the probability of certain outcomes. See Schwartz, R. G. and F. G. E. Bollmann.
Choose Wisely: How IP Value Depends on R&D Strategy. In IP Value 2007: BuildingIntangible Asset Monetization – Athena Alliance

122

and Enforcing Intellectual Property Value. An International Guide for the Boardroom.
Globe White Page, 2007, pp. 67–71.
http://www.buildingipvalue.com/07KTI/p.67-71%20Duff%20&%20Phelps.pdf
270

Bond Basics: Asset-Backed Securities, op. cit.

271

Auditing Alternative Investments: A Practical Guide for Investor Entities, Investor
Fund Managers and Auditors. PriceWaterhouseCoopers, April 2007.
http://www.pwc.com/images/us/eng/fs/altim/0407_au322.pdf
272

Zuckerman, G., and S. Patterson. ‘Side-Pocket’ Accounts of Hedge Funds Studied.
Wall Street Journal, Aug. 4, 2006.
http://online.wsj.com/article/SB115465505123626547.html
Patterson, S. How Ritchie Dodged Early Grave with Broad Investment Changes. WallStreet Journal, Oct. 17, 2006.
http://online.wsj.com/article/SB116104446080094575.html
273

Tschirhart, J., J. O’Brien, M. Moise, and E. Yang. Bank Commercial Loan Fair Value
Practices. Paper #2007–29, Finance and Economics Discussion Series, Divisions ofResearch & Statistics and Monetary Affairs, Federal Reserve Board, Washington, D.C.,
2007.
http://www.federalreserve.gov/Pubs/feds/2007/200729/200729pap.pdf
274

Financial Accounting Standards Board. Statement of Financial Accounting Standards
No. 157: Fair Value Measurements, September 2006.
http://www.fasb.org/pdf/fas157.pdf
275

Supervisory Guidance on the Use of the Fair Value Option for Financial Instruments
by Banks. Basel Committee on Banking Supervision, June 2006.
http://www.bis.org/publ/bcbs127.htm
276

The use of fair value techniques is not, however, without risk. A requirement tomarket-to-market could result in certain assets being deemed worthless, even if theymight be of value at a later date or in changed circumstances. Likewise, techniques ofdetermining fair value are based on modeling assumptions that may or may notcorrespond to reality, and may thereby result in widely inaccurate value estimations.
See Bearing It All. The Economist, July 21, 2007, p. 74.
http://www.economist.com/finance/displaystory.cfm?story_id=9523386
A Book-Keeping Error. The Economist, Aug. 30, 2007.
http://www.economist.com/finance/displaystory.cfm?story_id=9724324
277

Walsh, P. The Keys to Raising IP-Backed Finance. Intellectual Asset Management,
October/November 2005, pp. 51–54.

Intangible Asset Monetization – Athena Alliance123

http://www.bmocm.com/products/investment/securitization/usa/articles/images/IPFinanc
e-Oct2005.pdf
278

Leung, J. Patent Securitizations, Patently Bad Idea? Risk/Benefit Approach Reveals
Possible Reasons for Lack of Patent Securitizations. IPL Newsletter, Vol. 25, No. 1, Fall2006.
http://www.abanet.org/intelprop/newsletter/iplfall06.pdf
279

Borod, R. S. and T. J. Cassidy. Clearing the Hurdles for IP Securitization in the UnitedStates. Intellectual Asset Management, October/November 2005, pp. 56.
http://www.iam-magazine.com
280

Ng, S., and H. Sender. Behind Buyout Surge, A Debt Market Booms. Wall Street
Journal, June 26, 2007, p. A1.
http://online.wsj.com/article/SB118282461107748034.html
281

Rosenberg, F., and T. Rozier-Boyd. Securitizing IP Assets in the Film Industry.
International Securitization & Finance Report, Vol. 9, No. 20, Nov. 15, 2006.
http://www.brownrudnick.com/nr/pdf/articles/REPRINT_Structured_Finance_Securitizin
g_IP_Assets_in_Film_Industry_International_Securitization_Report_Rosenberg__Fred_1
106.pdf
282

Bergelt, K., and E. Meintzer. IP Collateralization in Perspective. Intellectual AssetManagement, October/November 2005, pp. 69–72.
http://www.iam-magazine.com
283

Borod and Cassidy, op. cit., p. 55.

284

Ibid, p. 57.

285

For example, see this statement by the investment firm of Harris Nesbitt:“As a result of some of the unique risks, IP securitizations often necessitate
substantial due diligence in comparison to standard ABS deals. . . .While it is truethat each IP deal contains risks specific to the transaction, we believe that asvolumes grow, rating agencies, bankers, lawyers, and investors will become
comfortable with the asset class. As such, more standard structures will begin to
emerge for each of the sectors (if they haven’t done so already). Furthermore, pastissuers will begin to experience economies as they add follow-on transactions totheir existing securitization trusts.”
Intellectual Property-Backed Securitization: A Closer Look. Asset-Backed Update, Harris
Nesbitt, February 2004, p. 3.
www.securitization.net/pdf/secnewsletter_feb04.pdf

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124

286

Monetizing Intangibles—The Way Forward. Intellectual Asset Management,
December/January 2007, pp. 4–5.
http://www.iafinance.org/documents/IAFSSummaryfromIAM_21Insight.pdf
287

Roth, Alvin E. What have we learned from market design? Hahn Lecture, Economic
Journal, 118 (March), 2008, 285–310.
http://kuznets.fas.harvard.edu/~aroth/papers/2008_Hahn_Lecture_EJ.pdf
See also http://kuznets.fas.harvard.edu/~aroth/alroth.html for more on market design.
288

Jarboe, Reporting Intangibles, op. cit.

289

Nearon, B. H. Intangible Assets: Framing the Debate. CPA Journal, January 2004, p.
34.
http://www.nysscpa.org/cpajournal/2004/104/text/p34.htm
290

Henning, op.cit., p. 206.

291

Policy Framework for Investment. Organization for Economic Cooperation andDevelopment, Paris, 2006, p. 64.
http://www.oecd.org/dataoecd/1/31/36671400.pdf
292Morgenson, G. Foreclosures Hit a Snag for Lenders. New York Times, November 15,
2007.
http://www.nytimes.com/2007/11/15/business/15lend.html
293

For example, see Soroosh, J., and J. T. Ciesielski. Accounting for Special Purpose
Entities Revised: FASB Interpretation 46(R). CPA Journal, July 2004.
http://www.nysscpa.org/cpajournal/2004/704/essentials/p30.htm
294

See Paletta, D., and S. Hughes. SEC Is Reviewing Conduits, Other Possible Strains on
Banks. Wall Street Journal, Sept. 5, 2007.
http://online.wsj.com/article/SB118900451928218127.html
295

296

The Cost of Ideas. The Economist, Vol. 373, No. 8401, Nov. 13–19, 2004.

Jaffe Lerner, op. cit.
Merrill, S. A., R. C. Levin, and M. B. Myers, eds. A Patent System for the 21st Century.
Committee on Intellectual Property Rights in the Knowledge-Based Economy, National
Research Council, 2004.
http://www.nap.edu/catalog.php?record_id=10976
To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy,
op. cit.

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297

Hall, B. H. Business Method Patents, Innovation, and Policy. Economics Department,
University of California, Berkeley, Working Paper E03–331, May 4, 2003.
http://repositories.cdlib.org/iber/econ/E03-331
298

United States Copyright Office. Report on
Orphan Works. A Report of the Register of Copyrights, January 2006.
http://www.copyright.gov/orphan/orphan-report-full.pdf
299

See Halligan and Weyand, Trade Secret Asset Management, op. cit.

300

CJA Consultants. Patent Litigation Insurance: A Study for the European Commission
on the Feasibility of Possible Insurance Schemes Against Patent Litigation Risks. Final
Report, June 2006, p. 9.
http://ec.europa.eu/internal_market/indprop/docs/patent/studies/pli_report_en.pdf
For additional documentation, including responses, see
http://ec.europa.eu/internal_market/indprop/patent/index_en.htm
301

Booth, op. cit.

302

E-mail conversation from Cauthorn, K. K., Director, North America, SAMIAN
Underwriting Agencies Limited, Jan. 28, 2008.

303

Barumont, V., Sun Microsystems, as quoted in Booth, ibid.

304

Securities and Exchange Commission. Asset-Backed Securities, op. cit.

305

Haller, M., and M. Palim. The Rise and Rise of Patent Pools. Intellectual AssetManagement, October/November 2005, p. 9.
http://www.iam-magazine.com
306

Roubini, N. Ten Fundamental Issues in Reforming Financial Regulation andSupervision in a World of Financial Innovation and Globalization. RGE Monitor, March
31, 2008
http://www.rgemonitor.com/redir.php?sid=1&tgid=10000&cid=252412
307

UCC Capital Corporation. IP Innovator Newsletter, Vol. 3, No. 2, April 2005.

308

O’Haver, R. Monetize Your Intellectual Property. Mercer Management Journal, Vol.
16, 2004.
309

Arrow, A. K. Intangible Asset Deployment in Technology-Rich Companies: How
Does Innovation Affect Return on Assets? International Journal of Technology
Management (IJTM), Vol. 24, No. 4, 2002, pp. 375–390.

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126

310

Phelps, M. Turning a Patent Portfolio into a Profit Center. In Making Innovation Pay(B. Berman, ed.), John Wiley & Sons, Hoboken, N.J., 2006, p. 22.
311

McCurdy, D. P. Seeing Through the Illusion of Exclusion. In Making Innovation Pay(B. Berman, ed.), John Wiley & Sons, Hoboken, N.J., 2006, pp. 35–50.
312

Detkin, P. Roadblocks, Toll Roads, and Bridges: Using a Patent Portfolio Wisely.
Making Innovation Pay (B. Berman, ed.), John Wiley & Sons, Hoboken, N.J., 2006,
pp.71–72.

313

For example, see Paradise, E. Human Capital: The Forsaken Resource. In Shearer, op.
cit., pp.59–66.

314

The authors intend no pun here, even though “invisibles” used to be the common
British phrase for intangibles.
315

See Action Alert No. 07–52. Financial Account Standards Board (FASB), December
28, 2007.
http://www.fasb.org/action/aa122807.shtml
Intangible Assets. International Accounting Standards Board (IASB).
http://www.iasb.org/Current+Projects/IASB+Projects/Intangible+Assets/Intangible+Asse
ts.htm316

IASB, ibid.

317

Securities and Exchange Commission. Conditions for Use of Non-GAAP Financial
Measures, op. cit.
318

The Shifting Paradigm in Business Reporting and Oversight. American Institute ofCertified Public Accountants (AICPA), Assurance Services Executive Committee, April
2008, p. 28.
http://www.systrust.us/Professional+Resources/Accounting+and+Auditing/BRAAS/Assu
rance_Services_Executive_Committee.html#White_Paper
319

Blair and Wallman, Unseen Wealth, op. cit.
Strengthening Financial Markets: Do Investors Have the Information They Need? Reportof an SEC-Inspired Task Force, May 2001.
http://www.fei.org/download/SEC-Taskforce-Final-6-6-2k1.pdf
Council on Competitiveness. Innovate America: National Innovation Initiative Report,
December 2004.

320

Malackowski, J. E. Risky Business: Overlooking Patents as Financial Assets. In
Making Innovation Pay (B. Berman, ed.), John Wiley & Sons, Hoboken, N.J., 2006, p.
93.

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127

321

According to the OECD:“As intellectual assets reporting guidelines have been mainly adopted by non-listed
SMEs, financial market considerations have not played a major role but financing
conditions nevertheless have been important. Benefits have been reported by somecompanies in their relationships with creditors. In Germany, one company experienced adecrease in its interest rate which allowed the company to save several hundred thousand
euros as well as an upgrade of its rating to ‘Investment Grade Rating.’ In Japan, anothercompany received a higher evaluation for its borrowing by a regional bank after having
explained the substance of its IT security-related business in its IABM report in March
2006. Furthermore, Japanese companies asking for funding for R&D projects to NEDO
(the R&D funding agency) are now required to present IABM-based reports. These areadmittedly a tiny sample from which to draw conclusions but may nevertheless be
indicative of future developments.”
See Intellectual Assets And Value Creation: Implications for Corporate Reporting.
Organization for Economic Cooperation and Development, Dec. 10, 2006, p. 20.
http://www.oecd.org/dataoecd/2/40/37811196.pdf
322

Henning, S. The Economic Infrastructure, Standards, Regulations, and CapitalMarkets. In Shearer, op. cit., p. 54.
323

Blair and Wallman, ibid., pp. 70–71.

324

See http://www.ebr360.org.

325

International Private Equity and Venture Capital Valuation Guidelines, October 2006
edition.
http://www.privateequityvaluation.com/documents/International_PE_VC_Valuation_
Guidelines_Oct_2006.pdf
326

Updated U.S. Private Equity Valuation Guidelines. Private Equity Industry Guidelines
Group, March 2007.
http://www.peigg.org/images/2007_March_Updated_US_PE_Valuation_Guidelines.pdf
Reporting and Performance Measurement Guidelines. Private Equity Industry Guidelines
Group, March 1, 2004.
http://www.peigg.org/images/PEIGG_Guidelines_3-1-05_FINAL1.pdf
327

Under SEC regulations, only ratings from “nationally recognized statistical ratingorganizations” (NRSROs) can be used to determine if investments by financial institutes
meet certain requirements (i.e., are considered “investment grade”). Historically,
NRSROs had been recognized by the SEC under a rather informal arrangement. The
Credit Rating Agency Reform Act of 2006 laid out a more formal system of registration andoversight. See Securities and Exchange Commission. Oversight of Credit Rating Agencies

Intangible Asset Monetization – Athena Alliance

128

Registered as Nationally Recognized Statistical Rating Organizations. 17 CFR Parts 240
and 249b [Release No. 34–55857; File No. S7–04–07] RIN 3235–AJ78, June 18, 2007.
http://www.sec.gov/rules/final/2007/34-55857.pdf
328Johnson, S. SEC Wants Firms to Explain Fair-Value Choices. CFO Magazine, March
31, 2008
http://www.cfo.com/article.cfm/10945941
329

SEC. Corporation Finance: Sample Letter Sent to Public Companies on MD&A
Disclosure Regarding the Application of SFAS 157 (Fair Value Measurements). March2008.
http://www.sec.gov/divisions/corpfin/guidance/fairvalueltr0308.htm
330

Building a New IP Marketplace. A Global Innovation Outlook 2.0 Report, IBM, 2006.
http://domino.research.ibm.com/comm/www_innovate.nsf/images/gioip/$FILE/building_a_new_ip_marketplace-report.pdf
331

German Institute for Standardization (Deutsches Institut für Normung). ISO Project
Committee for Brand Valuation.
http://www.din.de/cmd?level=tplartikel&menuid=49589&cmsareaid=49589&cmsrubid=56731&menurubricid=56731&c
mstextid=57833&3&languageid=en
332

See Köllner, M. Developing a patent valuation standard. Intellectual AssetManagement, February/March 2007, p. 5.
http://www.patev.de/files/pressespiegel/121.pdf
More on the Moves to Establish an International Standard for Patent Valuation.
Intellectual Asset Management blog, Jan. 24, 2008.
http://www.iam-magazine.com/blog/Detail.aspx?g=d4a330eb-8d28-41a9-ab60e1c591bcf249
333

See http://www.ansi.org.

334

The Federal National Mortgage Association (Fannie Mae), Federal Home Loan
Mortgage Corporation (Freddie Mac), and the Federal Home Loan Banks (FHLBanks)
are government-sponsored enterprises chartered by Congress to create a secondary
market in home mortgage loans through the process of securitization. See
http://www.fhlbanks.com; http://www.freddiemac.com; andhttp://www.fanniemae.com/index.jhtml
335

Formerly known as the Student Loan Marketing Association, SLM Corporation (Sallie
Mae) was originally chartered as a government-sponsored enterprise to create asecondary market in student loans, similar to Fannie Mae and Freddie Mac. Sallie Mae
was privatized starting in 1997, a process that was completed in 2004. Sallie Mae bothsecuritizes loans and makes direct loans.

Intangible Asset Monetization – Athena Alliance129

http://www.salliemae.com
336

Grading the Graders. Washington Post, Aug. 19, 2007, p. B06.
http://www.washingtonpost.com/wpdyn/content/article/2007/08/18/AR2007081800953.html
Calomiris, C. W., and J. Mason. Reclaim Power from the Ratings Agencies. Financial
Times, Aug. 24, 2007. Available at
http://www.aei.org/publications/pubID.26692,filter.all/pub_detail.asp
337

See Kosar, K. R. Government-Sponsored Enterprises (GSEs): An Institutional
Overview. Congressional Research Service, Order Code RS21663, updated April 23,
2007.
http://assets.opencrs.com/rpts/RS21663_20070423.pdf
338

For example, late last year the SEC changed a number of rules affecting small
business, including Rule 144, which covers restricted securities. How that rule change
might affect the sale of securities backed by intangible assets is unclear. See UnitedStates Securities and Exchange Commission. SEC Votes to Adopt Three Rules to Improve
Regulation of Smaller Businesses, Nov. 15, 2007.
http://www.sec.gov/news/press/2007/2007-233.htm
339

Anderson, J., and V. Bajaj. Loan Reviewer Aiding Inquiry Into Big Banks. New YorkTimes, January 27, 2008.
http://www.nytimes.com/2008/01/27/business/27subprime.html
340

A Monoline Meltdown? The Economist, July 26, 2007.
http://www.economist.com/finance/displaystory.cfm?story_id=9552987
Bernard, S. MBIA Loses $2.3 Billion on Write-Downs. Associated Press, Jan. 31, 2008.
http://www.washingtonpost.com/wpdyn/content/article/2008/01/31/AR2008013100728.html
341

Richardson, K., and L. Pleven. New York Seeks Bailout of Bond Insurers.
Wall Street Journal, Jan. 24, 2008, Page A3.
http://online.wsj.com/article/SB120112113207710911.html
Treaster, J. B. A Regulator Not Stymied by Red Tape. New York Times, Jan. 9, 2008.
http://www.nytimes.com/2008/01/09/business/09buffett.html
342

Ng, S., and S. Pulliam. The Bond “Transformers.” Wall Street Journal, Jan. 30,
2008, Page C1.
http://online.wsj.com/article/SB120165349019826957.html
343

Lucchetti, A., and S. Ng. How Rating Firms’ Calls Fueled Subprime Mess: Benign
View of Loans Helped Create Bonds, Led to More Lending. Wall Street Journal, Aug.
15, 2007, Page A1.

Intangible Asset Monetization – Athena Alliance130

http://online.wsj.com/article/SB118714461352698015.html
Horsley, S. Ratings Firms Scrutinized for Role in Credit Mess. Morning Edition, National
Public Radio, Aug. 22, 2007.
http://www.npr.org/templates/story/story.php?storyId=13854858
344

Fortune magazine ( B. McLean, editor-at-large) quoted on Credit-Ratings Firms andthe Mortgage Monster. All Things Considered, National Public Radio, Aug. 13, 2007.
http://www.npr.org/templates/story/story.php?storyId=12750740
345

Securitization Standing Committee. Demystifying Securitization for Unsecured
Investors, Special Comment. Moody’s Investors Services, January 2003, p. 2.
http://www.garp.com/frmexam/download/2005Readings/DemystifyingSecuritizationsJan
03.pdf346

Penner, E. Can the Financial Markets Make a Comeback? Wall Street Journal, Aug.
27, 2007, Page A11.
http://online.wsj.com/article/SB118817063701609287.html
347

Ibid.

348

For a recent overview, see The Alchemists of Finance. The Economist: Special Reporton International Banking, May 19, 2007.
http://www.economist.com/surveys/displayStory.cfm?story_id=9141486
349

As N. Behravesh, chief economist of forecasting firm Global Insight, is quoted assaying, “It’s like investors are in a huge minefield, and they don’t know for sure where
the mines are. So their instinct is just to freeze.” See Lynch, D. J. Easy Money Started
Crisis; Uncertainty Fuels It. USA Today, Aug. 8, 2007.
http://www.usatoday.com/money/economy/2007-08-12-crunch-q_N.htm
350

Lachman, D. Subprime Blues Sound Familiar. Financial Times, Aug. 2, 2007.
http://www.aei.org/publications/filter.all,pubID.26597/pub_detail.asp
351

Francis, D. R. Wall Street Wakes Up to More Risk. Christian Science Monitor, July16, 2007.
http://www.csmonitor.com/2007/0716/p16s01-cogn.html
352

Malmgren, H. The Fear of Central Bankers—Flight from Illiquidity and Heightened
Risk of Contagion. Intent Blog, Asymmetric Threats Contingency Alliance (ATCA), July12, 2007.
http://www.intentblog.com/archives/2007/07/dr_malmgren_the.html
353

The President’s Working Group on Financial Markets. Policy Statement on Financial
Market Developments, United States Department of the Treasury, March 2008

Intangible Asset Monetization – Athena Alliance131

http://www.treasury.gov/press/releases/reports/pwgpolicystatemktturmoil_03122008.pdf
354

Ibid, p. 5.

355

Murphy, op. cit.

356

UNH Whittemore School Receives Largest Grant in History of School: Money Funds
System to Help Inventors Speed Process of Commercialization. University of New
Hampshire, Feb. 23, 2006.
http://www.unh.edu/news/news_releases/2006/february/lw_060223grant.html
357

See, for example, Hall, B. H. Tax Incentives for Innovation in the United States. Paper
prepared for the EU, Jan. 15, 2001.

358

Atkinson, R. D. Expanding the R&D Tax Credit to Drive Innovation, Competitiveness,
and Prosperity. Information Technology and Innovation Foundation, April 2007.
http://www.itif.org/files/ExpandR&D.pdf
359

Atkinson, R. D. Will We Build It and If We Do Will They Come: Is the U.S. Policy
Response to the Competitiveness Challenge Adequate to the Task? Presented at theAmerican Association for the Advancement of Science Policy Conference, Washington,
D.C., April 21, 2006.
http://www.itif.org/files/aaasfinal2006.pdf
Mann, C. L. Globalization of IT Services and White Collar Jobs: The Next Wave of
Productivity Growth. Institute Economics Policy Brief PB 03–11, December 2003.
http://www.iie.com/publications/pb/pb03-11.pdf
360

The PACE-Finance Act of 2006 (S. 2199) called for such a study of the tax code as it
relates to investments in innovation. The provisions of this bill were not adopted as partof the America COMPETE Act signed into law in 2007 (P.L. 110–69), although thesubject of taxation was included in the request for a National Academy of Sciences study
on barriers to innovation.
361

United States Patent and Trademark Office, Pilot Concerning Public Submission ofPeer Reviewed Prior Art: Official Gazette Notice, June 26, 2007.
http://www.uspto.gov/web/offices/pac/dapp/opla/preognotice/peerreviewpilot.pdf
The Community Patent Review: Peer-to-Patent project.
http://dotank.nyls.edu/communitypatent/about.html
362

For example, see United States Patent and Trademark Office. Examination of Patent
Applications that Include Claims Containing Alternative Language. Proposed Rule. 37
C.F.R., Part 1 [Docket No.: PTO–P–2006–0004] RIN 0651–AC00, Federal Register,Vol. 72, No. 154, Aug. 10, 2007, pp. 44992–45001.
http://www.uspto.gov/web/offices/com/sol/notices/72fr44992.pdf

Intangible Asset Monetization – Athena Alliance132

United States Patent and Trademark Office. Changes to Practice for Continued
Examination Filings, Patent Applications Containing Patentably Indistinct Claims, andExamination of Claims in Patent Applications. Final Rule. 37 C.F.R., Part 1 [Docket
Nos.: PTO–P–2005–0022; PTO–P–2005–0023] RINs 0651–AB93; 0651–AB94, Federal
Register, Vol. 72, No. 161, Aug. 21, 2007, pp. 46716–46843.
http://www.uspto.gov/web/offices/com/sol/notices/72fr46716.pdf
363

Agres, T. New Patent Rules Hurt Biotech? Changes to Streamline Patenting Process
Could Add Cost, Time, Experts Say. The Scientist, Aug. 21, 2007.
http://www.the-scientist.com/news/home/53497
Weinberg, S. U.S. Patent Office to Unveil New Continuation Rules Monday. Dow Jones
NewsWires, Aug. 20, 2007.
364

For a summary, see Thomas, J. R., and W. H. Schacht. Patent Reform in the 110th
Congress: Innovation Issues. Congressional Research Service, Order Code RL33996,
updated Jan. 10, 2008.
http://anticipatethis.files.wordpress.com/2008/01/crspatentreformrpt.pdf
365

Lamoreaux and Sokoloff. op. cit., p.4.

366Frank, S. J. In the Clamor to Fix Things, Let’s Not Make Them Worse. IEEE
Spectrum, December 2005.
http://www.spectrum.ieee.org/dec05/2349
367

Ibid.

368

Patent Litigation Insurance: A Study for the European Commission on the Feasibilityof Possible Insurance Schemes against Patent Litigation Risks. Final Report, CJA
Consultants Ltd., June 2006.
http://ec.europa.eu/internal_market/indprop/docs/patent/studies/pli_report_en.pdf
369

Patent Litigation Insurance. Danish Patent and Trademark Office.
http://int.dkpto.dk/ip-policy/selected-policy-areas/patent-litigation-insurance.aspx
370

http://www.patent-enforcer.eu/home.html.

371

Halligan and Weyand, Trade Secret Asset Management, op. cit.

372

Serafino, D. Survey of Patent Pools Demonstrates Variety of Purposes andManagement Structures. KEI Research Note 2007:6, Knowledge Ecology International,
June 4, 2007.
http://www.keionline.org/index.php?option=com_content&task=view&id=69

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133

373

Clark, J., J. Piccolo, B. Stanton, and K. Tyson. Patent Pools: A Solution to the
Problem of Access in Biotechnology Patents? United States Patent and Trademark Office,Dec. 5, 2000.
http://www.uspto.gov/web/offices/pac/dapp/opla/patentpool.pdf
374

Antitrust Guidelines for the Licensing of Intellectual Property. U.S. Department ofJustice and the Federal Trade Commission, April 6, 1995.
http://www.ftc.gov/bc/0558.pdf
375Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation andCompetition. U.S. Department of Justice and the Federal Trade Commission, April 2007.
http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf
376

Schacht, ibid., notes that studies show that less than 10 percent of federal patents are
ever used.
377

Bayhing for Blood or Doling Out Cash? The Economist, Dec. 20, 2005.
http://www.economist.com/science/displaystory.cfm?story_id=5327661
Leaf, C. The Law of Unintended Consequences. Fortune, Sept. 19, 2005.
http://money.cnn.com/magazines/fortune/fortune_archive/2005/09/19/8272884/index.htm
Rai, A. K., and R. S. Eisenberg. Bayh–Dole Reform and the Progress of Biomedicine.
Law and Contemporary Problems, Vol. 66, No. 1, Winter/Spring 2003, pp. 289–314.
http://www.law.duke.edu/shell/cite.pl?66+Law+&+Contemp.+Probs.+289+(WinterSprin
g+2003)378

Risk-Based Capital Standards: Advanced Capital Adequacy Framework. Office of theComptroller of the Currency, Department of the Treasury; Board of Governors of theFederal Reserve System; Federal Deposit Insurance Corporation; and Office of Thrift
Supervision, Department of the Treasury, March 20, 2006.
http://www.federalreserve.gov/generalinfo/basel2/DraftNPR/NPR
379

Ibid., Title V—Calculation of Risk-Weighted Assets, Section C—Credit Risk
Mitigation (CRM) Techniques, Subsection 1—Collateral.

380

Banks bide time on Basel II launch. Associated Press, March 3, 2008
http://www.businessweek.com/ap/financialnews/D8V6A0080.htm
381

For example, the Small Business Act (P.L. 85–536) specifically includes intangibles
in its list of property classes that the SBA can receive.

382

Small Business Administration. National 7(a) Lenders Guide.
http://www.sba.gov/idc/groups/public/documents/oh_columbus/oh_columbus_nationalle
nderguid.pdf

Intangible Asset Monetization – Athena Alliance383

See http://www.sba.gov/sbaforms/sba1244.pdf.

384

The SBA Standard Operating Procedures guide also states that only tangible assets
may be counted in determining the net worth size of a business for the classification of“small business.” Small Business Administration. SOP 50–10(4).
http://www.sba.gov/sops/5010/sop50104e.pdf
385

Ohio Bed and Breakfast Owner Pleads Guilty to Conversion of Collateral. Office ofInspector General, Small Business Administration, October 2002 Update.
http://www.sba.gov/IG/update02-10.pdf
386

Low and Kalafut, op. cit.

387

LoPucki, L. Death of Liability. Yale Law Journal, Vol. 106–1, 1996.

388

Schwarcz, op. cit.

134