Legal Regulation Research On The Underlying Assets For Patent Securitization

Intellectual property financial innovation is a critical part to realize the creation,utilization,management,protection and service in overall intellectual property protection strategies,as promoted by the Party Central Committee and the State Council.Intellectual property securitization is the core element of intellectual property financial innovation with patent securitization best represents the innovativeness of this initiative,but it is also the most complex and challenging form of intellectual property securitization.Specifically,resolving the legal complexities of the underlying assets for patent securitization is the most important aspect in making the process a success.However,as China is still exploring this form of intellectual property securitization,relevant legal and administration supervision is still at its embryonic stage,it is therefore the intention of this paper to attempt a systematic legal study on underlying assets for patent securitization and put forward suggestions in perfecting the relevant legal and administrative procedures.The objective is to be of reference value in improving the legal system governing patent securitization and its underlying assets.The paper is divided into four parts.Chapter one stresses the need to subject underlying assets for patent securitization under proper legal supervision by analyzing the mechanics of patent securitization in conjunction with investigation on selected patent securitization cases.Chapter two analyzes transaction of underlying assets through the prospective of patent as well as other civil and commercial laws.Chapter three focuses on issues related to credit status of the underlying assets by analyzing the current credit enhancement and credit rating systems.Chapter four which is the concluding chapter provides suggestions based on both legal and administrative means in perfecting the legal supervision of the underlying assets for patent securitization.Chapter one explains the mechanics of patent securitization which is the utilization of the continuous and stable cash flow from developing and operating patents as underlying assets which are then undergone a securitization process,resulting in the issuance of investable securities backed by such underlying assets.It is a process in which the originator can obtain needed financing while cash flow from the underlying assets would be used as payment of principal and interest to investors of the relevant securities.During the securitization process,the originator transfers the rights over the income generated by patents or relevant derivative claims as underlying assets to a special purpose vehicle(SPV).Afterwards,based on the cash flow generated by the underlying assets in the SPV,administrator of the securitization would issue tradable securities in capital markets to finance the originator,after credit enhancement and other credit related operation by certain external intermediaries,such as credit rating agencies,to issue.In patent securitization,parties involved include originators of the securitization process,special purpose vehicles,administrators,obligors,guarantors,banks and other institutions,as well as the other intermediary agencies such as credit rating agencies,law firms,accounting firms,and asset valuation specialists.The object of patent securitization is the underlying assets.The content of patent securitization is the act of transferring and disposing of the underlying assets by the subject through a special purpose vehicle.The corresponding arrangements can be summarized as "entrustment + asset sales ".Through the analysis and comparison between five recent cases of patent securitization in China and the two classic ones in the United States under relevant legal norms and theories,the structure,underlying assets,special purpose vehicles,credit enhancement measures and other important elements involved are carefully examined.This paper concludes that the single and most eminent aspect in the research of patent securitization is the clarification of the underlying assets of patent securitization and the legal regulations on related operations.As for the underlying asset of patent securitization,it generally does not include the patent right itself,but the related right over income originated specially from three types of income right,patent assignment fee income right,patent licensing fee income right,and patent secured loan payment income right.The underlying assets of patent securitization are patent related,as such characteristics of patents including uncertainty on ownership and stability of the right,variability on value of the right,lack of liquidity on the right,difficulty on the valuation and disposition of the right and all these could lead to risks like early termination,invalidation,potential loss or value reduction of the underlying assets,difficulty in disposing patent rights and patent application rights,and the inability to counter prior unregistered patent licenses.The above accounts for the differences between underlying assets for patent securitization and those for traditional asset securitization.Chapter two is the research on the legal system related to the underlying assets of patent securitization,the author examines existing patent laws and other civil and commercial laws.On patent laws,the research involves patent assignment,patent licensing and patent pledge.Under the existing patent legal framework,there are relatively clear regulations on patent assignment,licensing and pledge.However,in practice,only patent assignment is most clear and complete,but not for patent licensing and patent pledge.For example,registration with authorities is not mandated for patent licensing to become effective,and patent application rights may not be pledged.When looking into present civil and commercial legal systems,the two focuses are” bankruptcy isolation” and “true sales” as relates to underlying assets for securitization.As far as bankruptcy isolation is concerned,the conclusion is that under the current legal framework and in practice,the lack of an independent legal status of special purpose vehicles would still preserve bankruptcy isolation of the underlying assets through contractual arrangements between the originator and the administrator.On the topic of true sales,the right over income as the underlying assets in patent securitization can be transferred under the current legal framework.Still,it is the finding of the paper that such transfer is not clearly stipulated,so it is necessary to state squarely as a matter of law that such underlying assets can be transferred freely in the context of patent securitization.Chapter three is the research on the legal system related to credit status of the underlying assets for patent securitization,the author researches the relevant legal rules in credit enhancement and credit rating.In terms of credit enhancement,this paper inspects seven internal credit enhancement measures and three external credit enhancement measures,and then analyzes the way that such credit enhancement measures resolve corresponding risks of patent securitization.The paper concludes that while the current regulations on credit enhancement for patent securitization underlying assets are relatively complete as far as procedures go,the qualification and criteria as well as optimal combination of the underlying assets enabling a sound credit enhancement process remind as a substantive issue.There is also vagueness in applying patent pledge as an internal credit enhancement measure in relevant regulations.In terms of credit rating,this paper concludes that,similar to the situation in credit enhancement,the process and procedures of credit rating under the current legal requirements is relatively complete.Still,the qualification and criteria as well as optimal combination of the underlying assets enabling a sound credit rating process reminds as a substantive issue.Chapter four is the concluding part which suggests a “dual track” supervisory system from both legal and administrative perspectives to resolve issues as discussed above on underlying assets for patent securitization.On the legal side,it involves changes on the patent and civil and commercial legal systems.In the existing patent legal system,it is suggested that patent licensing agreements should be mandatorily filed with relevant authorities before they could be used as underlying assets in patent securitization.Also,the pledge of patent application rights should be allowed as legitimate underlying assets.In the existing civil and commercial legal systems,the civil code,bankruptcy law,and relevant asset securitization laws and regulations have provided a strong footing enabling bankruptcy isolation of the underlying assets.There is no need to specifically grant special purpose vehicles with substantive legal status.Just as important,more work should be in place to ascertain smooth transfer of claims on underlying assets to strengthen the legal ground for their movement in the securitization process.In the administrative front,the focus is to resolve the regulatory gaps over the criteria of underlying assets undergoing both credit enhancement and credit rating processes,and the optimal combination of such underlying assets.Legal guidelines for the underlying assets of patent securitization are suggested in addressing the aforementioned issues.Such guidelines would include: First,regulatory recommendations for the eligibility standards of the underlying assets,including the legality of related patents,the legality of the underlying assets,the legality of the transfer of underlying assets,and the legality of the guarantee of underlying assets.Second,on optimizing portfolio of underlying assets,it is necessary to diversify them as much as possible to reduce risks.Specifically,strict scrutiny should be applied over the balance of the receivables and payment cycle of the underlying assets,the concentration of obligors on geography and industry,the concentration of the type of patent underlying assets,and the range of credit enhancement measures employed by the underlying assets.Finally,as a supplementary effort,disclosure should be required to control the risk of mixing up obligors’ payments and the originators’ own capital as well as risk associated with deterioration of the originator’ business conditions.Likewise,for the obligors of patent right payments,scrutiny and disclosure should be in place to ensure quality of business operation,repayment ability and credit status.