Intellectual Property: Patents, Trademarks & Contracts for Public Offerings
When it comes time to take your company public, the SEC doesn’t care if your company isn’t profitable. They don’t care whether or not there is a great deal of cash in the bank. They don’t care if you’re a startup either. What they care about most is that you’re real. The job of the SEC is not to screen bad investments, but bad actors and schemers who’re trying to pull the wool over the eyes of an unsuspecting public. There are a couple of ways to give the SEC some confidence that what you’re doing is not some new pump-and-dump opportunity. The best way to ensure your outfit is legit is to have some proof of revenue. It doesn’t necessarily need to be a great deal, but the business really isn’t a business unless it has begun taking in money. Second, the company could own some asset(s) that holds the promise of future revenue. Such an asset could include anything from oil rights to patents and trademarks and everything in between. In the late 1990’s and early 2000’s such assets were domains names and the companies that went public with them. Here we’ll discuss some of the positives and negatives of using assets as a means for taking a company public and what you can do to ensure your public offering using your assets or intellectual property is done in-line and above board.
Benefits of Intellectual Property & Contracts
The biggest benefit to solidly protected intellectual property is the ability to maintain market leadership in a particular market niche without being beholden to other potential competitors or entrants. It’s an unnatural barrier to entry that any startup would absolutely kill for. When it comes to going public it also paints a viable story for a business that may need or desire public status to raise some capital, but doesn’t have much in terms of traction or revenue. The SEC likes such a business because it’s a better story for protecting investors. The investors like it because it’s a better story for protecting investors.
One great benefit of having multiple patents inside a public company is the ability to create spin-off entities of a particular patent portfolio. If a business is created, taken public and holds a large number of applicable and viable patents, then said patents can be used to create public company spin-offs where each company simply is a mirror image, in terms of shareholders, of its public parent. Even if one individual spin-off is successful in its own right, the returns to the shareholders can sometimes be greater as separate entities. Keep in mind, this typically only works when you have separate teams with the right expertise to make it work. As always, a success of any kind is all about the people.
Similar to IP is the ability to use a secured long-term contract with a reputable company, companies or government entity to do a public offering. Such an opportunity not only gives investors much more confidence, but ensures your public offering is much more solid, especially if you’re using it to raise some capital.
Downside Risks
Because we’re talking about startups, there are a couple of types of risks at play here. First, there is the technology risk. Just because you have a patent on something doesn’t necessarily mean that you’ll be able to get that patent into production. Or perhaps the company has a patent for something like fission, but getting it to work may be nigh to impossible. In addition, there is also implementation risk. Even if the engineering and development team is able to deliver on all the promises that the patent represents, it doesn’t guarantee success. The company also must include success in operations, fulfillment and support. An advanced marketing, sales, finance and accounting team are also required to ensure the business can take a promising technology and maximize its potential.
Some of these risks can be mitigated by owning a portfolio of patents, trademarks and contracts, but the assets are only as good as the revenue they produce. One such company with a trove of patents is Seattle-based IntellectualVentures. While IntellectualVentures is a private company–and considered very secretive–the company hasn’t had as much success as it probably would have liked in it’s spin-out efforts. If you own enough patents and have a good legal team, you can even replicate the IntVen model of patent trolling, but you’ll likely get a lot of bad press and certainly many more counter lawsuits as a result. This is one of the reasons Mark Cuban of Broadcast.com and SharkTank fame has kept himself one step removed from his patent trolling company Vringo. This is the type of strategy that works for those that enjoy a good legal battle, don’t mind the bad press and have the cash to pay for it.
While going public is not for everyone and can be especially detrimental to the startup with little to no revenue or profits, it can certainly be a viable option to the right intellectual property holder with the right process and plan in place to take the company to the next level. If you’re interested in taking your intellectual property public, please get in touch, we would love to help.
- Covid-19 Impact on US Private Capital Raising Activity in 2020 - May 27, 2021
- Healthcare 2021: Trends, M&A & Valuations - May 19, 2021
- 2021 Outlook on Media & Telecom M&A Transactions - May 12, 2021
