While MSMEs account for the vast majority of businesses in the Philippines, it remains a challenge for them to use their IP as collateral. While legislation is in place to encourage their use, in practice, says Editha R. Hechanova, implementation of the law remains largely unrealized. 

In the Philippines, micro small and medium-sized enterprises (MSMEs) account for 99.59 percent of all businesses providing about 65.1 percent of total employment, and contributing to over 55 percent of the GDP according to data from the Department of Trade and Industry (DTI). Lacking in traditional assets, e.g., physical assets, one of the more pressing concerns of the MSMEs, is access to finance to sustain and grow their businesses. A welcome move was the promulgation on August 17, 2018, of Republic Act No. 11057, or the Personal Property Security Act (PPSA). Its objectives are to promote economic activity by increasing access to cheaper credit, particularly for MSMEs by establishing a unified and modern legal framework for securing obligations with personal property, including intellectual property. The PPSA Implementing Rules and Regulations (IRR) took effect on December 3, 2019, and under Section 2.03n, the term “intellectual property” refers to intellectual property rights (IPR) as defined in Section 4.1 of Republic Act 8293 (IP Code of the Philippines) and shall include copyright, trademarks, service marks, patents, industrial designs and trade secrets. Two issues appear to be paramount to the effective implementation of the PPSA: operationalization of the electronic registry and the valuation of intellectual property rights. 

The electronic registry  

Two conditions are required for the PPSA to be implemented: (i) the establishment of the Registry by the Land Registration Authority (LRA), and (ii) that this Registry is operational. The Registry will contain information on personal properties that are registered as collateral, and will be available to banks and could help hasten the loan application process. Presently, the implementation of the PPSA remains incomplete. A verification with the LRA revealed that the LRA continues to operate under the old Chattel Mortgage Law for registering securities. Consequently, only traditional assets are recorded, such as real estate or equipment, as collateral in its system. This is despite the fact that the PPSA designates the LRA as the official repository by way of the electronic Registry for all encumbrances, including those involving IPRs.  

To comply with the requirements of the PPSA, the LRA has initiated a project called the Personal Property Security Registry (PPSR). This registry is intended to catalogue all types of personal property used as collateral, including IPRs. However, the completion timeline for this project is still uncertain. 

Intellectual property valuation 

Our research shows that both government and private banks do not accept IPR per se as collateral for loans. The government does provide grants and assists in securing loans from government banks.  

DOST-TAPI 

The Department of Science and Technology (DOST) and one of its agencies, the Technology Application and Promotion Institute (TAPI), in partnership with the Land Bank of the Philippines, has initiated the Innovation and Technology (I-TECH) Lending Program which offers financial support to Filipino inventors with patented inventions, ready for commercialization. The inventor can secure a loan of about US$190,000, but he has to put up a 15 percent equity. The low interest of 5 percent per annum applies only to the loan portion provided by Land Bank which shares 45 percent, and the DOST-TAPI grant with no interest covers 40 percent of the loan. To qualify, the inventor must possess an active IPR such as a letters patent, utility model registration and design registration. 

Only projects deemed viable by DOST-TAPI for specified industries or sectors are endorsed to Land Bank for credit evaluation. Borrowers are required to submit several documents, e.g., a business plan, feasibility studies for start-ups, financial projections, audited financial statements, collateral documents e.g., real estate mortgage, chattel mortgage, etc. 

As gathered from two major government banks, Land Bank and the Development Bank of the Philippines (DBP), the PPSA indeed provides a legal framework for using personal property, including IPRs, as collateral, but the absence of an established process to assess the financial value of IPRs, particularly in collaboration with technology inventors and the lack of a standardized valuation method for IPRs, poses a significant challenge when attempting to use it as collateral.  

In instances where IPR is to be used as collateral, the Land Bank coordinates with the DOST-TAPI. DOST-TAPI’s role is to evaluate whether an invention or patent is viable and beneficial to society. While the PPSA has provided that intellectual property is acceptable as collateral, banks are hesitant to accept IP as the primary collateral and hence still require loan applicants to provide “hard collaterals” such as real estate, to fully secure the loan. There is also that sentiment that there is no established process to convert IPRs into liquid assets, and internally, it lacks a system or the skilled manpower to accurately value IPR in monetary terms. 

Private banks 

In addition to the challenges faced by government banks, private banks such as Security Bank, BDO and EastWest have also expressed a lack of familiarity with using IPR as collateral. In personal interviews conducted with representatives from these banks, it was revealed that they neither have knowledge of IPRs being used as collateral nor do they accept IPRs as security for loans. This indicates a broader issue within the banking sector, where the potential of IPRs as a form of collateral is not yet recognized or utilized. The absence of a clear and standardized process for valuing and securing IPRs further complicates their adoption within both public and private financial institutions. 

IP valuation 

The Philippines is not lacking in providing training in IP valuation and has been the recipient of many seminars or workshops on it coming from the World Intellectual Property Organization (WIPO), government sponsored trainings such as the patent drafting, IP management and commercialization masterclasses for state universities and RDIs done by one of the councils of the DOST, the Philippine Council for Agriculture, Aquaculture, Natural Resources on Research and Development (PCAARRD) thru the Association of PAQE Professionals, Inc. (APP), comprising of certified patent agents, the Intellectual Property Office of the Philippines (IPOPHL), DOST-TAPI, the Licensing Executive Society of the Philippines (LESP) which is now hosting the certification course for IP valuation conducted by AMAVI. 

DOST-TAPI does IP valuation and has published an IP Valuation Manual in 2020 authored by TAPI Director Marion Ivy. D. Decena and her staff. This manual is being used as reference by government grant-funding agencies and RDI. 

For the proper administration of real property taxation, the Bureau of Local Government Finance (BLGF) of the Department of Finance (DOF) adopted the IVSC Valuation Standards under Philippine Setting, and DOF formally joined the IVSC and published the second edition of the PVS which dealt not only with the valuation of real property but also intangibles such as IPR. This became the basis for pushing for the Valuation Reform Act under House Bill 8453. Just recently, on June 13, 2024 the President of the Philippines signed into law Republic Act No. 12001 or the Real Property Valuation and Assessment Reform Act, with no provisions touching on intangibles. 

IP valuation is not yet a recognized profession in the Philippines, so there is no formal list of practitioners, unlike other professions such as the practice of law, medicine, engineering and others. However, the DOST which implements the requirements for the Fairness Opinion Report (FOR) under RA 10055) which evaluates licensing agreements for government funded inventions and the private sector, has an informal list of professionals doing IP valuation.  

In a discussion among IP valuation practitioners initiated by the DOST-PCAARRD, APP and LESP, the conclusion arrived at was that there are many variables in IP valuation, and the skill and judgment of the valuator is a major factor, and no consensus was reached on the specific approach to be used in determining the value of an IPR, e.g., cost, market or income.  

View of neighbouring countries 

The Creative Economy Law of Indonesia (Law 24/2019) allows intellectual property assets of the creative economy to be used as collaterals to secure bank financing. The Ministry of Tourism and Creative Economy (MoTCE) has listed enterprises that falls under the creative economy business (e.g., game development, music, product design, visual communication design, fashion, publishing, television and radio, architecture, crafts, etc.). On IP valuation, it must be conducted by an IP appraiser or appraisal board who much possess a license from the Ministry of Finance, and the Financial Services Authority, a certification of competency in IP valuation, and registration with the MoTCE. 

For Malaysia, only trademarks and industrial designs have been expressly allowed by law to serve as collaterals. This is provided in Section 62 of the Trademarks Act of 2019, and Section 29(5) of the Industrial Design Act 1996/Act 552. Registered trademarks and registered industrial designs are considered as personal or moveable property and acceptable as collaterals under the foregoing laws. 

In 2014, the government of Singapore launched its IP Financing Scheme (IPFS) in support of the cost of IP valuation and share the risk of potential default on IP-backed loans with participating financial institutions and to raise awareness. But still some financial institutions, due to unfamiliarity with the use and value of IP, have reservations about using IP as collateral. Another concern for the financial institutions is the low liquidity of IP assets due to the lack of secondary markets. Illiquid IP may be volatile with respect to its value and its ability to be disposed of under distressed conditions. To address this concern, the Singapore IP Strategy 2030 aims to increase the commercialization of IP through various business transactions. The confidentiality of certain data/information relating to IP is not disclosed in the company’s financial report, and this could hamper the valuation of an IP asset. It has been reported that the Intellectual Property Office of Singapore (IPOS) and the Accounting and Corporate Regulatory Authority of Singapore (ACRA) are creating a committee to closely work with an industry working group that will co-develop an IP disclosure framework that will encourage IP financing activities. Singapore is also opening digital channels including non-banks for capital raising, which could boost IP-backed financing. 

What now, PPSA? 

It does look that the Philippines may be trailing behind a bit from its neighbours in terms of using IPRs as loan collaterals. The current landscape suggests that significant efforts are needed to develop the necessary legal, procedural and technical frameworks to support the valuation and use of IPRs as collateral. Increasing awareness of the importance of intellectual property and the valuation of IPRs, particularly the IPR intensive sector of the MSMEs that may not have the hard assets but may have the intangibles including intellectual property, and may or may not be aware that they have it. be Without these, the objectives of the PPSA to enhance the MSMEs access to finance would, remain unfulfilled.