The vibrant Scottish life sciences sector has great potential but its growth is tethered by a funding gap. In this blog we consider whether the reforms introduced by the Moveable Transactions (Scotland) Bill (the Bill), in particular the ability to create a new statutory pledge over intellectual property (IP), might go some way to addressing that funding gap.
The life sciences sector in Scotland
Scotland boasts being home to one of the largest life science sectors in Europe, employing around 40,000 people and is, or at least ought to be, well-poised to capitalise on future opportunities in the life sciences space. Its ability to establish itself as a global player in the life sciences field was again recognised last week when, announcing a new strategy to help Scotland’s life sciences sector grow its exports, the Scottish Government highlighted the huge growth potential for the sector and declared its intention do everything possible to support the industry as it looks to expand and target new markets.
Earlier this year, my colleague, David Gallagher, in discussing the Scottish Government's Campbell Report, which explored options to attract increased investment in Scotland's growing life sciences sector, highlighted that there remains a funding gap for Scottish life science businesses seeking investment to upscale growth, and to fund activities such as clinical trials and product development. Access to much needed capital for Scottish life science companies looking to upscale is difficult.
Along with IT, food and drink, oil and gas and renewable technologies, life sciences is one of Scotland's IP-rich sectors, with IP frequently making up a large part of the businesses' value. In their report on moveable transactions the Scottish Law Commission recognised that it was important that businesses in Scotland are able to exploit fully their IP assets.
Granting security over IP – the current position
It is common for businesses looking to secure working capital and cash flow to grant security over assets owned by the business. Those assets can take many forms, including IP such as patents.
Deficiencies in the current law in Scotland mean that the only way of taking fixed security over IP is by assignation (transfer) and licence-back so that the borrower can continue to use the IP for its business.
Also, an assignation of IP can only be granted to one secured creditor, which can restrict the borrower's ability to raise finance using IP as collateral.
IP can be secured by a floating charge, but only corporate debtors can grant this type of security and floating charges have a lower ranking in insolvency than fixed security so are less attractive than fixed security to lenders.
Granting security over IP – the future position
The Bill introduces a new form of fixed security – the statutory pledge – which:
- can be created over IP
- is created by registration in the new Register of Pledges (without need for assignation and licence-back arrangements)
- can be granted over identifiable future IP – here the security will be created when the granter becomes the owner of the IP
Also, more than one statutory pledge can be granted over the same IP.
Benefits for the life sciences sector
At present there is no indication as to when the Bill will become law and when the new statutory pledge will be available, but the new security will be attractive to life science companies and potential lenders alike.
Removing the need for the transfer of the IP to the lender and often complex contractual licensing arrangements back to the borrower, together with the fixed nature of the security (giving the lender a better position on insolvency than under a floating charge, where available) ought to reduce the cost of financing.
The ability to grant a statutory pledge over future IP could also encourage funding for life science businesses awaiting the grant of patents or other IP. Furthermore, the ability for a life science business to grant more than one statutory pledge over its IP could open up financing options, enabling various lenders to lend with security over the life science business's most valuable assets, subject to ranking arrangements.
It remains to be seen whether the new statutory pledge can bridge the funding gap for life science businesses but it is hoped that the availability of this new form of fixed security will make IP-secured financing simpler and more cost effective for life science borrowers.