A Royalty Interest is a legal right to some portion of a company's revenue or income. The originators of Royalty Interests are academic research institutions, inventors and established companies, rich in technology and intellectual property rights. A Royalty Interest is created when the owner or licensor of the future royalty income stream sells all or part of this stream for a defined period of time.
Royalty Income is generated by the owner or licensor of intellectual property rights from a licensee that has incorporated technology related to these legal rights into a product or device for commercial sale.
alseTIP's primary focus is acquiring, or providing financing secured by, Royalty Interests. The primary motivation for companies or institutions to sell such interests is because they represent attractive sources of financing.
The fundamental principal behind intellectual property structured finance is that the intellectual property of a business together with any associated existing or future income streams from license agreements and/or revenue and Royalty Interests generated from the manufacture and sale of product(s) and device(s) supported by the intellectual property constitute assets that can be sold or financed.
Intellectual property structured finance transactions have just recently become a more prevalent method of financing. In general, there are two types of intellectual property structured finance transactions: structured finance transactions based on current income-producing intellectual property and structured finance transactions based on future income-producing intellectual property.
One of the primary reasons for the emergence of this type of financing is that companies and research institutions have begun to realize that their substantial investment in emerging technology has created value and should be recognized. In addition, the public accounting professions regulatory body recently changed the financial reporting procedures to permit companies to reflect, in particular circumstances, the market value of intellectual property on the their balance sheet. Without the ability to recognize the value of this intellectual property on the balance sheet and take advantage of it in financing, the investment and the value it created becomes a stranded and worthless asset until it earns substantial income. Tangible assets are not treated in this way.
Structured finance transactions are of particular interest and benefit to businesses that have invested in activity that has generated valuable intellectual property. Intellectual property structured finance transactions provide businesses with lower funding costs, are self-financing, and can provide much-needed liquidity to capital-constrained firms without requiring dilution of ownership.
Structured finance transactions are attractive because they allow a company to gain access to financing based on the market value of the intellectual property, even though the market value may not be reflected on the company's balance sheet. In some instances, the balance sheet can be enhanced when a business is able to report the fair market value of their intellectual property on the balance sheet as an asset with the reporting of a corresponding liability for the amount of the financing and the difference being reflecting as an addition to equity.
In general, this type of structured finance is secured by intellectual property rights together with any associated existing or future revenue or income stream from license agreements and/or profits generated from the manufacture and sale of products and devices (“Royalty Interests”). These cash flows constitute assets that can be sold or financed.
Royalty Interests are senior to claims of equity holders.
Read about the mechanism of IP structured finance in general
Learn about alseTIP's transaction process
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