   
  
IP/C/W/679  
 
27 May 2021  
(21-4409) Page: 1/3 
Council for Trade -Related Aspects of  
Intellectual Property Rights  Original: English  
 
  
INTELLECTUAL PROPERTY AND INNOVATION: INTELLECTUAL PROPERTY FOR 
INVESTMENT/FINANCING/FUNDING  
COMMUNICATION FROM AUSTRALIA, CANADA, CHILE, THE EUROPEAN UNION, JAPAN, 
SWITZERLAND, THE SEPARATE CUSTOMS TERRITORY OF TAIWAN, PENGHU, KINMEN AND MATSU, 
THE UNITED KINGDOM AND THE UNITED STATES  
1  INTRODUCTION  
1.  Financing affects every stage of the innovation cycle from idea creation to commercialization, 
expansion and long -term business sustainability.1 There is untapped potential in financi ng, relating 
to the innovation process, potentially bringing benefits to humankind, in line with the issues explored 
in this document.  
2.  Innovative and creative businesses can often find it difficult to use their existing or potential IP 
assets to unlock fun ding, particularly when compared with businesses that hold more conventional, 
tangible assets.  
3.  A key challenge to innovative businesses is the lack of awareness in the financial services sector 
of the role of IP in generating cash flow. A business may see k funding from debt, equity (including 
hybrid debt/equity) or grant finance.  
2  ROLE OF IP IN GENERATING CASH FLOW  
4.  IP supports cash flow in ways that can support international trade2: 
a. Direct routes to cash generation – through sales of licences or franchises  of IP which can 
broaden the reach of businesses into different regions or territories.  
b. Indirect routes to cash generation – through sales of products or services provided 
where the IP protects the ideas behind the product or service.  
3  BUSINESS FINANCE AND THE CHALLENGES FOR IP INTENSIVE BUSINESSES  
Debt finance  
5.  Debt finance involves borrowing money and means that the company will need to both pay back 
the money that it has borrowed and pay interest. Some loans may be backed by guarantees from 
government or other third parties, however many lenders will require collateral. For IP to be used 
as collateral it must fulfil the requirements of the lender and the laws of the country where the lender 
is based, including accounting regulations which may no t recognise internally generated intangible 
assets on company balance sheets).  
 
1 WIPO Global Innovation Index 2020: Who Will Finance Innovation?  
2 Noting the territoriality of IPRs.  IP/C/W/679  
 
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  6.  Debt finance may not be suitable for early stage businesses because a borrower will need to 
demonstrate sufficient cash flow to repay the loan as well as the interest. IP intens ive businesses 
may be less likely to have tangible assets and may not yet generate enough cash at their early 
stage.  
7.  The main benefit of this type of finance to the borrower is to reduce the dilution of equity for the 
current shareholders. According to OEC D research3 the main source of external finance for most 
small and medium sized businesses (SMEs) is bank debt.  
Bank Debt  
8.  There are some factors that pose challenges to bank debt with IP as collateral. In particular, the 
banking regulations introduced aft er the 2008 financial crisis, the international Basel III framework, 
specifically exclude intangible assets such as IP from the definition of assets for the purpose of 
calculating the banks ' ratio of assets to loans. As a result, banks have a limited appet ite to lend to 
businesses without tangible assets for collateral.  
Venture debt  
9.  Venture debt is usually obtained by start -ups or early stage businesses that have already 
completed rounds of equity financing (see below). It is usually complementary to equity  finance and 
could be provided by banks that specialise in venture lending or non -bank lenders. Often, these 
specialised lenders have greater awareness and expertise around assessing IP compared to 
traditional banks.  
Private Debt  
10.  The term Private debt usua lly applies to non -bank debt that is not traded on an open market. 
Private debt will typically be used to finance business growth or working capital.  
Equity finance  
11.  Equity finance involves selling a portion of shares in the company, which means selling a s take 
in the ownership of the business in exchange for cash. The company will not need to pay interest to 
the investor but will give up a share of the profits when the company becomes successful. Often the 
investor will become involved in some of the decisi on making in the company. The investors will exit 
their investment by selling the shares.  
12.  Sources of Equity finance for IP intensive businesses  vary at different stages in their growth 
journey. Cross border deals are possible, subject to regulations : 
a. Busin ess Angels use their own money to invest in promising start -ups. They will usually 
bring knowledge, experience and connections as well as capital.  
b. Venture Capital (VC) typically invest a minority stake (less than 50%) in the equity of an 
early stage busine sses showing potential for exceptional growth. Funds tend to come 
from financial institutions and are pooled to make an investment fund. VC investors will 
typically have a seat on the board and often offer management or technical advice in 
addition to capi tal. 
c. Private Equity (PE) investors will typically buy a majority stake (more than 50%) in later 
stage companies that are well established.  
 
3 OECD (2018) "Fostering the use of intangibles to strengthen SME access to finance"  
https://www.oecd -ilibrary.org/deliver/729bf864 -en.pdf?itemId=%2Fcontent%2Fpaper%2F729bf864 -
en&mimeType=pdf  IP/C/W/679  
 
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  Grant finance  
13.  Grant funding is given for a specific purpose and is not usually repayable, subject to meeting 
the cri teria. A potential drawback is that the grant can only be spent on something very specific and 
nothing else, the spending will need to be reported back to the grant provider.  
14.  Potential sources of grants include public bodies and charities.  
Possible actions  by governments  
15.  Aside from potential Grant Finance, there are several ways that governments, for example IP 
offices, may be able to assist innovative and creative businesses in using IPRs to support access to 
finance.  
16.  Governments can also push for infrastr uctural changes such as better financial reporting of 
intangible asset information to reduce information asymmetry between businesses and capital 
providers.  
17.  IP offices can provide basic guidance and assistance on various IPR aspects. Individual questions 
and needs may be met by preparing reader -friendly IP material, including patent and trademark 
basics, examination overviews, information on patent searching and resources on legal assistance 
that could be used by inventors and businesses in becom ing investor ready.  
18.  IP offices could consider accelerated patent examination procedures for particular types of 
patent applications. This process could shorten the time between application and grant, enabling 
SMEs to attain financial support more quickly.  
Guiding questions  
1. What are Members' experiences with their businesses and other entities using IP to raise 
finance internationally?  
 
2. What are Members ' experiences of how TRIPS has influenced the flows of finance between 
countries?  
 
3. What forms of I P-related measures taken by Members have proven useful for the support of 
SMEs in their financing/commercialization strategy and which ones have not?  
 
4. How can Members work together to address challenges posed by international frameworks 
(e.g., banking a nd accounting frameworks)?  
 
5. How can the awareness of the benefits of IP be raised with finance providers?  
 
6. According to the experience of Members, what are the main challenges for IP intensive 
businesses in raising finance for international expansion ? 
 
__________  