The development of new technologies and viral spread of communication networks have both rendered possible the rise of businesses that own very few tangible assets and owe their success almost within intellectual property.
The practice of securing obligations is an ancient one, with roots reaching back to the code of Hammurabi. The code of Hammurabi is among the ancient codes of laws in human history. Laws 49 and 50 of the Hammurabi code regulated loans secured by cultivated land. Under the ancient commercial law, tangible property was regularly employed as collateral – assets that are a subject matter of a security interest.
By contrast, Intellectual property rights have seldom been used as collateral as ancient cases of New Ixion Tyre Co. versus Spilsburry (1893) 2 Ch. 484 illustrate. However, throughout the latter half of the twentieth century, the world economy has undergone fundamental transformations. The relative importance of tangible property has relatively diminished because of rising debt stress and ever-increasing value though static property.
Unlike real property, Intellectual property is not static.
It is settled in English law that real consensual securities may be created on Intellectual property. Section 105 of the Companies Act, 2012 provides for registration of charges. A charge is defined under Section 2 of the Act as a form of security for the payment of a debt or performance of an obligation consisting of the right of a creditor to receive payment and includes a mortgage.
Section 105(3) of the Companies Act provides that a charge may be registered on goodwill, patent or licence, trademark or on a licence under the Copyright Act.
It is evident that startups may use their Intellectual property to create a charge on them and access credit from financial institutions. For this to happen, we must have a precedent of working startups assisted with the infrastructure required.
Uganda has been ranked as the world’s most entrepreneurial country by Global Entrepreneurship Monitor (GEM), recording the highest youth entrepreneurs with 55.6 per cent of the youth population involved in new or established businesses.
Uganda’s tech start-up scene is taking shape with a series of innovators rolling out Applications to address gaps in the market. But behind this rise in innovation is a tale of frustration among most tech-starts in terms of financing their operations to become profitable companies. Fortunately, the law has provided for mechanisms on how startups can use their intellectual property, if any, to access credit.
Most startups’ success in Uganda according to startupranking.com, will be driven by high level of internet penetration in Uganda and Africa at large. As Telecommunications launch 4G network across the country, most startups collapse before their first birthday solely because of lack of capital. Innovation startups do not have real property but may pledge their intellectual property as security.
To perfect a security interest in intellectual property, the lender must sufficiently describe and record the security interest with the proper governmental authority. This is done with the relevant Registrar at the Uganda Registration Services Bureau. The law provides for different Registrars of Patents, copyrights, Trade Secrets, trademarks, etc.
Intellectual Property due diligence and the proper transfer of all Intellectual Property related assets is critical to ensure a lender is secure. Just as a lender would perform due diligence when real property is pledged as collateral for a loan, including a full title review, all IP assets should be meticulously reviewed prior to closing. It is best practice to have the lender’s Counsel conduct an independent review of the transfer and acquisition of all IP assets from the seller to the borrower.
Generally, there are two methods of perfecting security interests in intellectual property assets; by a written security agreement and by assignment of ownership of the intellectual property to the secured party coupled with a license granted back to the pledging party.
Despite the cost of money in Uganda being expensive, the Government has established a special fund for innovation in Uganda. The establishment of this fund is likely to position the country as an innovation hub. On August 30 and September 1 2019, the President wrote directing for a fund to be created for ICT innovation.
Rwanda in its quest to become Africa’s ICT hub has created a $100 million (Shs 339 billion) Fund to address funding challenges by Rwandan technology entrepreneurs. The Rwandan government will contribute $30 million (Shs101.7 billion) and they will mobilise the rest from the private sector.
For development to take place quickly, we need bold and rapid innovation. This is why the United States of America has led in very many spheres of life. They support innovation and entrepreneurship and they have created such huge ecosystems that employ millions.
Since startup’s biggest problem is access to finance, innovators may take advantage of the legal framework and access credit through using intellectual property as security.