The Taskforce is coaching its members and financial counter parties on how to conduct transactions using IP backed securities. As these transactions become refined and standard valuation methodologies are accepted, an IP SECONDARY MARKET will blossom.
IP Secondary Market Summit Highlights
Taskforce Summit
on IP Value Extraction & Corporate Valuation -
Part (1) : (2) : (3) : (4)
Frequently Asked Questions
- Is there a Mission Statement for the Taskforce Transactions/IP2 Team?
Yes, it has three components:
1. To develop methods by which significant portions of Taskforce Members' patent portfolios can be used as a source of revenues, profits and cash flows that comply with the law and intents of good corporate governance and protocols according to Sarbanes - Oxley, GAAP Accounting standards and IRS review.
2. To create demand in the Capital Markets for Members' R&D achievements by incorporating IP Value Drivers into the Secondary Market's existing investment protocols.
3. To help the Taskforce Executive & Organizational Development Team identify and define the critical corporate competencies required to empower the company to begin conducting IP based transactions; and to help the Taskforce Corporate Valuation Team identify and define the variables that affect the value of IP and IP's value on the total enterprise.
- What is the Accelerated Licensing Program (ALP)?
The ALP transfers the patent licensing rights from the originating company to a buyer who "steps into the shoes" of the seller with the intent of converting licensable IP into third-party royalty-based revenues.
- What kind of IP is incorporated into an ALP Transaction.
Typically patents that have previously been approved for licensing by the seller's existing procedures and protocols.
- Who is eligible to participate in the Taskforce's ALP?
Taskforce Members in good standing.
- What is the basic structure of the ALP?
It is a three part program consisting of (1) a sale of patents, (2) a license back to the seller and (3) a technical support contract where the buyer retains the technical support from the seller's SMEs (subject matter experts).
- Has the ALP been approved by the IRS?
The IRS does not pre-approve transactions. However, the Taskforce has conducted independent research and has concluded that for several reasons, the ALP program would be deemed to be a legitimate business transaction were it to be reviewed by the Service. (See the Summit Report in "Participation Section" of the Taskforce web site at www.km-iptask.org)
- Have any Member companies looked at the ALP and addressed the tax issue?
Yes, again, the summit report utilized a special team to design the program so that it would meet the strident standards of corporate governance in the post Sarbanes-Oxley environment. Several members are currently working their portfolios in preparation for a transaction.
- What are the benefits of adopting the ALP?
There are six primary benefits:
1. Revenues
2. Cash flows
3. High after-tax profits (typically 65% or higher)
4. Monetization/commercialization of "High-hanging Fruit"
5. Potential reduction in a Member's cost of capital.
6. Agility (a new tool) in meeting liquidity problems.
- What are the potential risks/difficulties of adopting the ALP?
There are five primary risks/difficulties associated with the program:
1. Control of the patents transfers to the buyer;
2. The buyers are typically financial entities who retain outside licensing firms to execute the ongoing patent mining and therefore licensing success is more of an unknown;
3. The sellers are typically "tech transfer" personnel with minimal capital market experience who will need finance/capital market training and support;
4. The purchase price, as well as the license-back terms are presently negotiated on a transaction-by-transaction basis which may extend the elapsed time to get to a closing;
5. The current flow of transactions is not yet at critical mass to warrant secondary market trading, and therefore the primary buyers will initially hold, rather than flip the pool they purchase.
- How are the components of the ALP transaction captured in the seller's financial statements?
At closing, revenues, cash and ordinary income tax are reported on the sale; long-term license payable and intellectual property recorded to reflect the license-back agreement. In future periods, royalty expense (royalty payments), service revenues, cash and operating/SME expenses (tech support services) will be recorded.
- Is the After-Tax Net Present Value of an ALP transaction positive?
Yes. Depending on the Sales Price, Effective Income Tax Rate, Internal Rate of Return and License-back Terms, the transaction can generate positive cash flows, before incorporating technical service/patent mining support fees. ALP models suggest that on a $50 million transaction, the after-tax NPV could be in the $3 -$5 million range, plus future technical support fees.
- What are the economic benefits to the buyer in an ALP Transaction?
There are four primary benefits to the buyer:
1. The acquisition of commercializable IP that generate significant ROI;
2. Resale opportunities into the secondary market;
3. Lower investment risk because the seller/licensee is credit worthy and the assets are "investment grade" assets;
4. Depreciation expense of the IP.
- What are the primary risks to the buyer?
There are four primary risks to the buyer:
1. Third-party cash flows do not materialize;
2. The seller/licensee defaults;
3. Access to the secondary market is denied;
4. Tax laws are materially altered.
- Are buyers members of the Taskforce.
Currently no, however, certain current Members have financing divisions that may become buy-side participants and an ALP Transaction, where the assets were created and sold by another Member.
- Will the Taskforce create its own Secondary Market?
No. The objective of this program is to channel Members' IP into current secondary market channels, but the Taskforce will begin transactions that provide proof of viability to members and investors; develop valuation and transactional protocols to support the integration of IP into the nation's capital markets.
- Will the IP Secondary Market require the enactment of any new legislation?
No.
- If I want to learn more, whom do I contact?
See the Taskforce website at www.km-iptask.org or call:
Bob Shearer, Taskforce Program Director
972-490-9100 bshearer@km-iptask.org
NOTE: Creative IP Solutions is the Taskforce contractual member service provider for 2004.
|
