“可以预期知识产权交易市场潜力巨大，绝对是一个蓝海。当市场蓬勃发展时，律师事务所作为参与主体之一，肯定也要加强投入。”杜晓宽律师坦言，“有些领域我们知识产权律师目前就可以参与进来，例如我们通常会建议客户做freedom to operate（FTO），即‘自由实施‘，将客户的技术方案进行全面检索，一方面这是对于自己专利情况的客观评价，未来它也会构成评价和交易的基础。”
CASH IN ON KNOWLEDGE
China is making great strides in innovation, but how can the nation truly bring out the value of knowledge as asset?
The State Council recently issued the Guiding Opinions on Improving the Evaluation Mechanism of Scientific and Technological Achievements, which aim to explore credit lending based on the value of innovations, and financing against pledges of IPs and IP securitization, areas which are expected to become new growth hotspots for law firms.
China has undoubtedly become an intellectual property powerhouse. A total of 339,000 invention patents were authorized in the first six months of 2021, the China National Intellectual Property Administration revealed. By the end of June, the number of valid invention patents from China had reached 3.324 million.
Meanwhile, the number of domestic enterprises with valid invention patents reached 270,000 by the end of June.
IP has become an indisputably important asset of enterprises. However, many obstacles remain in China when it comes to monetize IP as capital assets. In response, the national "14th Five-Year Plan" has explicitly included in its scope the task of "improving financial support for scientific and technological innovation.”
In August, the State Council issued the Guiding Opinions on Improving the Evaluation Mechanism of Scientific and Technological Achievements, emphasizing the need to "fully display the role of financial investment in the evaluation of scientific and technological achievements,” and putting forward requirements to "roll out credit lending based on knowledge value, increase the amount of financing against IPs pledged…, and explore IP securitization in a standardized manner.”
"The promulgation of the Opinions is closely related to the current social transformation in China and the economic environment both at home and abroad. It is inevitable given that reform and opening up has reached the current stage," says Simon Du, a partner at Gen Law Firm. "the Opinions are also based on a series of prior laws and regulations on the conversion of scientific and technological achievements."
Examples of such laws and regulations include the Law on Promoting the Conversion of Scientific and Technological Achievements in the early days, recent provisions in the Civil Code that trademarks, patents and copyrights can be transferred and pledged, as well as a slew of measures issued by relevant ministries and commissions as well as some provinces and cities.
The Opinions mainly focus on the evaluation and pricing of scientific and technological achievements, highlighting the importance of "establishing different evaluation systems according to different categories, vigorously developing market-oriented evaluation of scientific and technological achievements, and improving diversified market transaction and pricing models for such achievements, such as agreement-based pricing, listing and transaction, auction, asset valuation, etc."
"Evaluation is crucial. Without evaluation, value cannot be determined, making it even harder to truly convert scientific and technological achievements subsequently."
Simon Du, Gen Law Firm
"Evaluation is crucial. Without evaluation, value cannot be determined, making it even harder to truly convert scientific and technological achievements subsequently," Du explains.
However, China's IP evaluation system leaves much to be desired. According to Du, IP evaluation is presently mainly performed by third-party asset appraisal agencies. "Unlike the evaluation of physical assists, IP evaluation has unique characteristics, making it often difficult for appraisal agencies to give an assessment that meets market value. As a result, banks and other financial institutions are still very reluctant to extend credit based on IP."
"IP pledge financing, IP securitization and other fields mentioned in the Opinions are expected to become new business growth points.”
Zheng Xilin, Zhong Chunyu, Lifang & Partners
Zheng Xilin, a partner atLifang & Partners, and his colleague, Zhong Chunyu, share the same view. "As far as IP pledge financing is concerned, most banks and financial institutions are currently more inclined to require borrowers to provide land, real estate and other assets that can generate stable sources of repayment as mortgage collaterals," they note.
MORE SCIENTIFIC EVALUATION
In response to the above dilemma, "the Opinions have improved and clarified the evaluation mechanism for scientific and technological achievements by focusing on the aspects, parties and methods of evaluation as well as how to apply evaluation results, and has provided concrete guidance in detail," comments Du. "For example, evaluation should be comprehensive and cover areas such as science, technology, economy, society, cultural value, etc..”
In addition, as to the players involved in evaluation, the Opinions place particular emphasis on the need to "give full play to the role of financial..., guide relevant financial institutions and investment companies to conduct commercial evaluation..., and guide entrepreneurs, angel investors, venture capital firms, specialized technology transfer institutions and various market players to participate in R&D activities early.”
Zheng and Zhong point out that at present, financial and investment institutions are not only less involved in evaluation, but they also mainly “get involved only in the mid-to-late stages of the R&D activities of market players since earlier involvement means greater risks of failure given the R&D cycles of technologies and products.”
They believe that governments could nudge investors to participate early with more policy incentives. In reality, however, "local governments are also wary about this type of high-risk business,” and as a result, "government departments leading IP securitization are mainly those in economic development zones that have a considerable tolerance for risks.”
In Du's view, apart from financial and investment institutions, the market should also encourage lawyers to participate more actively in the evaluation process.
"At present, a small number of IP lawyers are already involved in evaluation but only to a limited extent, and they rarely give professional opinions on whether the rights are stable or constitute infringement," Du explains. "However, the inability to determine whether a patent is infringing or whether it will be revoked by others makes it difficult to truly reflect the value of the technology."
As the players involved in IP evaluation become more diverse and active going forward, Du also points out the need for regulators to clarify their roles in advance. "In the future, regulation may focus on who bears liability for evaluation. Even with professional evaluation, there is no guarantee that problems will never occur. Should a problem occur, do we tighten regulation, or do we leave it to the market to sort it out?" he asks.
"After all, IP evaluation is unlikely to achieve scientific pricing in the full sense, and it is also difficult for regulatory actions to achieve 100 percent accountability. Therefore, there needs to be an appropriate regulatory system that is neither too tight nor too lax, one that is suitable for the characteristics of IP transactions," he adds.
NOT YET ACTIVE
Apart from evaluation, the Opinions also talk about promoting IP transactions by "accelerating the development of a modern and high-level technology transaction market, promoting the establishment of a national IP and scientific and technological achievement property rights transaction centre, and exploring IP securitization in a standardized manner.”
Du describes the status quo of China's IP transaction market as "leaving much to be desired.” "Some cities have established regional marketplaces, but both the transaction volume and the level of information transparency are low."
An inactive market throws a spanner in the works for potential transactions. Du gives an example: Because of business transformation, a foreign client of his firm needs to spin off or close down a business unit that has amassed a very large patent portfolio in this field. "However, it is extremely difficult to transact this patent portfolio in China due to the lack of a unified national transaction center. The client has to promote the portfolio through intermediaries and individuals in the industry, which undoubtedly affects patent portfolio transactions and makes it difficult to fairly reflect the market value of that portfolio."
According to Zheng and Zhong, it is precisely because of the many problems in the IP transaction market that China's IP securitization also lags far behind in development.
They share with ALB that China has not yet formulated specialized laws and regulations on IP securitization. Relevant rules are scattered in the Patent Law, the Trademark Law, guidelines of the Shenzhen Stock Exchange and the Shanghai Stock Exchange, and documents issued by some provinces and cities.
Accordingly, the development of China's IP securitization market is still in its infancy, although some success has been achieved in practice. For example, the "Qiyi Century Intellectual Property Supply Chain Financial Asset-backed Special Plan" successfully raised 470 million yuan after being listed on the Shanghai Stock Exchange. "According to statistics, the total amount of IP ABS products issued in Shenzhen alone reached 1.428 billion yuan in 2020, and the amount of patent pledge and trademark pledge respectively stood at 9.671 billion yuan and 586 million yuan,” say Zheng and Zhong.
In their view, IP securitization has a special transaction structure, which benefits both innovation-oriented companies holding IPs and investors. On the one hand, these companies can retain and manage their IPs; on the other hand, IP securitization products have better liquidity and a risk-reward profile in-between stocks and bonds, making them ideal investment targets for investors to diversify their asset portfolios.
Although the gap between reality and expectation remains, IP financing and securitization undoubtedly represent the future and will bring a broader market for legal services.
"IP evaluation, transaction and securitization all require the active participation of law firms," points out Du. "From these areas, firms can play a very big role in the entire process of conversion or pricing evaluation of IPs/scientific and technological achievements."
Zheng and Zhong concur. They share that their firm has already "participated in multiple transactions in relevant fields and had accumulated experiences and talents.” Looking ahead, "IP pledge financing, IP securitization and other fields mentioned in the Opinions are expected to become Lifang's new business growth points.”
"We feel that the IP transaction market has huge potential and is definitely a blue ocean. When the market is booming, law firms, as one of the players, definitely need to increase investment," comments Du. "In fact, there are some areas where we can get involved now. For example, we usually advise clients to practice freedom-to-operate (FTO) for their patents, that is, to conduct a comprehensive search of the clients' technical solutions. Such a search not only serves to assess and protect their own patents, but will also form the basis of evaluation and transaction in the future."
To contact the editorial team, please email ALBEditor@thomsonreuters.com.