At the April 25 Zhongguancun IP Promotion Conference, the Zhongguancun Innovative IP Trust Plans of Assembled Funds (Phase I), was officially launched jointly by China Technology Exchange (CTEX), COFCO Trust Co., Ltd.(COFCOT) Beijing Vestone Capital Co., Ltd. (Vestone) and Beijing Fuhigh Financial Services Co., Ltd. (Fuhigh). Four Zhongguancun enterprises, AIRSYS Refrigeration Engineering Technology (Beijing) Co., Ltd., Beijing Cleartimes Environmental Protection Engineering- Tech Co., Ltd., Beijing Baogui Stone Art Science and Technology Co., Ltd., and BiaoQi Century (Beijing) Information Technology Co., Ltd., received trust loans totaling 20 million yuan.
The Innovation Process of Trust Plans of Assembled Funds
Small and medium-sized sci-tech enterprises have been faced with capital shortage in marketing their technological innovation. Beginning in 2006, a number of banks in Beijing and other cities have provided IP pledge financing with the support from the local Intellectual Property Offices. From then on, IP pledge loan has become an important financing method for sci-tech enterprises.
However, there are a number of problems for the IP pledge loan in practice. On the one hand, banks are reluctant to lend because it is difficult to assess IP value and there are many uncertainties in its marketing as a kind of invisible and intangible assets. On the other hand, the key difficulty is the control of high risk of IP pledge loan and the bank's own risk of relatively low tolerance. Therefore, when IP loan is made, it is usually required to be secured against through use of real assets as land properties, factory constructions, equipment, or other forms of collateral, which are exactly wanted by these small and medium-sized sci-tech enterprises. Moreover, the fund ratio is too low and the financing costs too high. All the foregoing and other practical factors have made IP financing loan a "white elephant" with unsatisfactory results.
Guo Shugui, the president of CTEX, made a comment in an interview, "In recent years, many of China's banks have made great contributions to the development of new and hi-tech enterprises by way of IP pledge loan. However, its scale has been very small and its role has not been fully played due to many difficulties such as valuation, disposition, liquidation, and etc."
In this context, CTEX and its cooperative partners have begun to explore other more effective financing methods for scientific and technological enterprises, and popularized IP trust, a new type of IP investment and financing method for them after more than a year of exploration, which is released and named as The Scheme of Debt Financing Trust for Innovative Businesses on February 1, 2010.
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| China Technology Exchange (CTEX), COFCO Trust Co., Ltd |
On June 10, 2010, CETX, Beijing International Trust Co., Ltd. Limited, Beijing Zhongguancun Sci-tech Guaranty Co., Ltd. and Beijing SMEs Credits Re-guarantee Co., Ltd. co-issued Trust Plan on Promoting the Transformation of Scientific and Technological Achievements. Three companies, including Beijing Ace Achieve Communications Co., Ltd., Beijing Cleartimes Environmental Protection Engineering-Tech Co., Ltd., and BiaoQi Century (Beijing) Information Technology Co., Ltd., accumulated a total of 11 million RMB in trust loan financing to supplement the current lack of financial support. It is hoped that the Trust Plans will develop a new financing model for promoting the transformation of scientific and technological achievements by way of intermediate institution engaged in trade of technology in terms of experiment on solving the financing difficulties confronted by small and medium-sized sci-tech enterprises in financing.
"However", Li Zhonghua, assistant president of CTEX, said in his interview with our correspondents that, "the trust plan requires a minimum of two companies; one engaged in guarantee and the other in trust. Therefore, it is still a traditional trust model in nature and essence. And there are many deficiencies for traditional trust products, such as difficulties in liquidation of the pledged IP, longevity of operating cycle, small amount of financing, and the lack of follow-up services."
In view of this, CTEX and its cooperative partners have made many efforts to introduce integrated trust funds program with IP pledge financing as major form through innovation on trust products, optimization of involved trust elements, designation of IP pledge and disposition, and introduction of supplementary services.
The Trust Plan is mainly to support high-growth and sci-tech enterprises which are in conformity with national policy of science, technology and industry, and with Beijing's urban functional position. It aims to add more economic value by more supports in the transformation of scientific and technological achievements in the fields of energy saving, environmental protection, new energy, new materials, IT, biotechnology, new medicine, advanced manufacturing, high-tech services and others.
CTEX, COFCOT, Vestone and Fuhigh co-signed a memorandum of cooperation on the establishment of "Project of Integrated Funds Trust for IP Financing in Zhongguancun National Innovation Demonstration Zone" on November 8, 2010 during the period of the 4th China (Beijing) Patent Week, and it was launched on April 25, 2011.
Characteristics and Advantages of Assembled Funds
It is widely believed that the Zhongguancun Innovative IP Trust Plans of Assembled Funds in Zhongguancun National Innovation Demonstration Zone is an important step in promoting scientific and technological innovation and providing financial support for the transformation of scientific and technological achievements because it successfully tackles with the difficulties in IP financing by a leveraged way of attracting social capital into the financial sector in support of science and technology development.
As a response to the understanding of "assembled funds" posed by the reporter, Li Zhonghua explained, "Assembled funds means a package of several enterprises for financing in order to reduce the risk of incidence of risks and a diversification of funding sources in order to decrease overall risk of financing. Funds come from the public raised through the issuing of trust plan, and from subscription of venture capital. In this way, diversification of funds can be realized to effectively spread the risk of IP financing pledge. In addition, the risk of IP pledge financing for an individual enterprise will be further lowered because we have adopted an integrated trust on the basis of unified organization, guarantee and distribution."
"The current trust project intends to satisfy differential needs in risks and gains of market players, to expand the scope of financing subjects, to maximize and optimize financing subjects and financial resources, to introduce social capital to provide IP pledge financing for small and medium-sized sci-tech enterprises by way of collective capital trust with the differentiation of risks and of income distribution structure between and among the preferential and general beneficiaries, of the introduction of venture capital as a general beneficiary from trust products with its assumption of guarantee liabilities, and of the optimization of participating elements in trust."
According to Li Zhonghua, this project intends to solve the financing difficulties confronted by small and mediumsized sci-tech enterprises with the feature of "few assets and more intellectuality in proportion" It is characterized by: (a) the introduction of different venture capital to participate in debt financing to decentralized high risk of IP pledge financing; (b) subscription by investment institutions with their assumption of guarantee liabilities to reduce the risk of financial institutions and to lower the threshold of IP financing for small and medium-sized sci-tech enterprises; (c) the participation of investment institutions in assessment of IP debt financing and the IP marketization of assessment by buyers to solve difficulties in IP valuation and (d) the adoption of trust products and introduction of social capital to provide small and medium-sized sci-tech enterprises with new financing channels.
"In comparison with the previous the Trust Plan on Promoting the Transformation of Scientific and Technological Achievements released by CTEX, the current trust project is characterized by its different product structure, which requires the involvement of investors and trust companies in the product designation and the investors shall bear guarantee liabilities at the same time." Li Zhonghua said.
Li Zhonghua also explained that, the current trust plan has the following advantages: (a) the flexibility of loan period for enterprises, which ranges from three months to one year in short term and one year to three years in medium and long term according to its demands of loans; (b) the stability of financing channel to meet the financing requirements which also provide an opportunity for enterprises to get sustainable loan from cooperative banks; (c) the convenience of lending procedure that one-stop service will be provide in terms of guarantee and loan which will be accepted and accredited at the same time to meet the financing needs of enterprises in time; (d) no mortgagee of fixed asset instead of IP and equity pledge, personal guarantees, and etc.; (e) the benefits that the value and influence of enterprises IP may be publicized, the image and power strengthened through CTEX platform by way of the trust project; (f) the value-added service provide by CTEX such as early warning on patent, infringement analysis, IP program analysis and evaluation for list and etc.; (g) further government backup in the future because the trust project has won strong support from Zhongguancun National Innovation Demonstration Zone, from which subsidized loans on IP pledge financing and others national policy may be enjoyed because of the strategy of independent innovation.
Procedure of the Trust Plan
It is said that there is a clear-cut division of labor between and among the four sponsors of the trust project.
"CTEX acts as the organizer and coordinator in the whole process of trust. It is mainly responsible for the selection and assessment of enterprise projects, for the disposition of IP risks, and for the designation of trust products and pre-loan investigation as an advisory in trust business." According to Li Zhonghua, "CTEX has functioned as a technological trading platform to discover and to realize the value of scientific and technological achievements. The disposition of IP in particular makes CTEX an exit channel for IP pledge financing. COFCOT provides financial support for IP commercialization by issuing trust project as a professional financial institution. Vestone is mainly responsible for the pre-examination and post-supervision on loan, and subscribes for 50% of the share of trust project as a general beneficiary, whereas Fuhigh provides credit guarantees to enhance its credit capacity as a professional investment consultant."
IP trust is still in the exploration as a new business at present. Why is CTEX so active in this regard? According to Li Zhonghua, CTEX intends, as national platform and by way of participating in the trust project, to develop an investment channel for social capital in small and medium-sized sci-tech enterprises, to provide SMEs with new financing products, especially for IP development, and to explore a new business model for CTEX itself.
Zhou Shuo, the project manager of CTEX financial services center of science and technology, explained that the current trust is the first debt financing project to fund loans on market with IP as pledge instead of the mortgage of real estate and land. How to tackle with different disposition of IP pledge according to different situations? Zhou Shuo said that there are many channels for IP disposition although P trading market is still in the process of improvement. Venture capital institutions have the ability in assets management and disposition. CTEX has the function of trading platform. Therefore, the difficulties in IP pledge can be tackled only to a certain extent.
Strong Policy Support
In recent years, Zhongguancun Science and Technology Park has achieved many remarkable fruits in IP system development as national demonstration area of independent innovation. According to statistics, applications of patent from enterprises in Zhongguancun Zone totaled 14,806, accounting for 25.8% of that of Beijing and 48.7% of that of all the enterprises in Beijing in 2010, including 9,128 patent applications and 8,834 patents granted, an increase of 38.9% year-on-year increase, and 2,890 invention patents, accounting for 32.7% of total patents. The Representative Office at Zhongguancun Demonstration Zone of Trademark Office of the State Administration for Industry and Commerce of the People's Republic of China accepted 19,267 trademark applications, issued 9 certificate of TM pledge, involving 37 trade marks and an amount of 87.6 million Yuan in 2010. In the same year, the registered software copyright at Beijing Municipality Registered Center for Computer Software totaled 4,800, accounting for 70% of the total at the Center.
In order to strengthen the combination of technology and financial resources, to promote the transformation of economic development pattern, and to improve the capability of independent innovation, Beijing Municipal People's Government formulated Opinions on Promoting Financial Innovation for the Development of Science and Technology of the Capital of China in October 2010. Opinions pointed out that a sci-tech financial service system shall be established in line with the sci-tech development and of the financial resources of the Capital, that measures shall be taken to promote comprehensive pilot reform of Capital's sci-tech finance, that all kinds of financial means, including the integrated funds trust project, shall be exploited in a comprehensive way, that market-oriented financing regimes for sci-tech enterprises shall be further expanded, that innovations shall be encouraged to the development of technology trading service models and of technology investment institutions, that technology investment funds and sci-tech shall be introduced to attract more social capital in the industrialization of scientific and technological achievements, and that CTEX shall be supported to develop into a technology exchange with international influence.
It is said that concerned governmental departments will play a dominant and pushing role in the implementation of this trust project, who shall subside the enterprises after their issuing of trust project in order to reduce enterprises' costs. Zhou Shuo also said that, according to Measures for the Administration of Supportive Funds to Guarantee Financing for the Enterprises in Zhongguancun National Innovation Demonstration Zone, Zhongguancun Administrative Committee will subside those enterprises to set off their overall cost at a proportion of 20% of fees and interests resulted from interests of public raising of funds, management fees of trust or bonds, and guarantees, fees, and other costs if they their bonds have been issued and they win the support from the trust project.
Prospects and Expectations
"IP financing is a kind of financing products with high risks in China in the current legal environment, resulting in a relatively high cost in enterprises' financing. Enterprises have been faced with many difficulties in financing although the relevant governmental departments have planned to give appropriate subsidies. Therefore, they hope that governmental departments may decrease their burden by way of purchasing parts of trust project to reduce their costs." said Li Zhonghua, "It will be very good if the governmental departments can subscribe some preferential shares by public financial funds, from which not only lever effect will be seen, but also the credit of trust project will be enhanced. This will push forward the development of IP financing and trust project in the future to a great extent."
It is known that there is no precedent in IP trust at home and abroad. However, there are explorations in IP pledge financing in various forms outside China, such IP securitization and leasing, and insurance for IP pledge financing. China has lagged behind the leading countries in this regard.
According to Li Zhonghua, the integrated trust scheme for IP financing has a prominent prospects and is apt to popularize in all high-tech industrial parks across China for the reasons that it is a trust product with a good match of risks and gains by way of its structuralized designation of trust products and introduction of investment capital in IP financing, that it is a kind of innovative product for small and medium-sized sci-tech enterprises in their financing with IP as their major assets, and that it has enriched and improved the current financing channels for these enterprises.
At last, Li Zhonghua expressed that he had full confidence in the trust project. "As far as the designation of trust products in the future is concerned, CTEX will gradually explore a mix financing model with a combination of venture capital, PE funds and trust project in order to achieve a diversified transformation of financing of scientific and technological achievements and their sustainable development by way of further structural optimization and innovative designation. Meanwhile, CTEX will further optimize and improve the designation of IP trust products, and actively explore for new financing products for small and medium-sized sci-tech enterprises on the combination of other ones at present to satisfy the financing needs of these enterprises in Zhongguancun Demonstration Zone. Next, CTEX will turn the trust project into a normal project, enlarge its scale, make experiment on rollover issue and copy this model to the rest of the country."
(Translated by Yuan Renhui)
