In today's increasingly knowledge - and services-driven economy, intellectual property (IP) can often be a company's most valuable asset. Whether an innovative and novel design, a unique algorithm, a distinctive brand name, or other registered design, protecting IP can often be the key to a business's success. But what happens when you need funding and IP is the principal collateral? Here are 5 key things you need to know about taking security over IP:
- You may need Scottish lawyers: even if your IP is registered at the UK Intellectual Property Office, IP owned by a business seated in Scotland is likely to be considered to be subject to the laws of Scotland. It is important therefore that any security taken over IP owned by a Scottish business complies with Scots law formalities.
- Taking security over IP under Scots law: unlike in England and Wales, taking effective fixed security over IP under Scots law requires an outright transfer of the asset to the security holder (albeit expressed to be a transfer in security). This can present some additional challenges. For example, particularly when borrowing from an alternative lender, it exposes the business to the strength of the security holder's covenant and the ability to re-transfer the IP on the termination of the financing arrangements. In addition, where a business relies on the ability to use its IP in the operation of its day-to-day business, a licence would need to be granted by the security holder back to the business, which can add complexity and cost. From a funder's perspective, other arrangements whereby the IP is not transferred until an agreed trigger event (such as a default under the loan documents) exposes the funder to the risk that the security is not effectively constituted and may later be subject to challenge under insolvency laws. Finally, reliance on a floating charge can be less appealing from a credit perspective given the relative disadvantages of floating security compared to fixed security in an enforcement scenario.
- Everything is about to change: for businesses located in Scotland, the introduction of the Moveable Transactions (Scotland) Act 2023 (the Act) offers exciting new possibilities for borrowers and funders. When it comes into force (expected to be during 2025) a new 'statutory pledge' will allow lenders to take security over IP without a requirement for the IP to be transferred to the security holder. Perfection of this new security will be by registration in a new Register of Statutory Pledges (rather than via notice). Together, this will dramatically streamline the process of taking security over IP and greatly improve the prospect of IP-backed financing.
- Registration matters: looking ahead, security over registered IP (such as patents, trademarks and registered designs) is far more likely to be of interest to prospective funders than unregistered IP (i.e. copyright, rights in unregistered trademarks, and unregistered designs) as the relative rights will be stronger. Time invested now in identifying and appropriately protecting IP by registration will better position Scottish business for a prospective wider range of funding options when the Act comes into force.
- Trade secrets: whether it will be possible to take a statutory pledge over knowhow or trade secrets under the Act remains an interesting open question. There is no express exclusion under the Act (or any commentary in its associated discussion papers) and so it may, at least in theory, be possible. However, the Act does require that the asset to be secured must be identified (either by listing it in the document or by listing items that form part of an identifiable class). This immediately causes an obvious issue where, for example, the asset requires to be kept inherently confidential e.g. a secret recipe or confidential process of manufacture. Rules in relation to whether the new Register of Statutory Pledges would permit redaction of the relevant information have yet to be published.
Scots law in its existing form has arguably resulted in Scottish IP being comparatively undervalued from a collateral perspective. The new Act provides a platform that it is hoped will give funders confidence to develop a wider range of IP-backed lending products and give Scottish businesses access to more funding opportunities.
For more information, please contact Peter Brading or Alison Bryce.
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