Skip to main content

JThe following article is part of an ongoing column called “Investor Insights”.

Presented by Ed Truant, Founder and Content Manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation funding.

Summary

  • Despite its size, the intellectual property (“IP”) asset class has escaped the attention of most asset managers due to its underlying legal complexities.
  • The litigation funding industry understands the opportunity, but it is only focused on litigation involving intellectual property
  • A void exists in the funding market, which IP-focused private credit managers have begun to fill through credit-driven strategies designed to drive value maximization.

Slingshot Previews:

  • Secular changes in the economy have meant that intellectual property assumes an increasing share of business value
  • Intellectual property is an emerging asset class that has begun to attract the attention of asset managers and insurers
  • There are various intellectual property-centric investment strategies that do not involve litigation.
  • IP-focused private credit funds approach IP holistically, leveraging the many ways IP creates value
  • Investors should be aware that investing in intellectual property presents unique risks that warrant the involvement of operational and legal intellectual property specialists.
  • IP credit offers a different risk/reward profile for investors, compared to commercial litigation funding which tends to have more quasi-binary risk

In Part 1 of this two-part series, the relatively nascent asset class of private intellectual property credit (“IP credit”) was introduced. This article has explored the basic premise of the asset class, discussed some of the financiers in the space, and reviewed some of the nuances inherent in the asset class. In part two, we take all of the knowledge gained in part one and apply it to a specific example by exploring a publicly traded company, which has used IP credit many times with great success.

Case study

Details of most IP Private Credit transactions remain confidential. One illustrative exception relates to two prior financings by formerly publicly traded cybersecurity company Finjan Holdings, Inc. (NASDAQ: FNJN) (“Finjan”), known for its proactive cybersecurity-related technologies. At the time of the fundings in 2016 and 2017, Finjan had focused significant efforts on licensing its patent portfolio – with significant financial success – in addition to other aspects of its business. But because licensing intellectual property often requires costly litigation to complete the negotiation process, Finjan, through its bankers, initiated a process to identify a strategic capital partner. Potential uses of proceeds included litigation and general operating expenses, as well as share buybacks.

Series A Funding (May 20, 2016)

Investment Series A Preferred Shares Investors Halcyon/Soryn
Quantity $10.2 million terms
  • Optional and Mandatory Redemption Provisions
  • Carry participation rights in revenue streams
  • Negative Events – Litigation and Treasury Related Events
  • Consent to declare dividends
Source: https://www.sec.gov/Archives/edgar/data/0001366340/000136634016000051/0001366340-16-000051-index.htm

Series A1 Funding (June 19, 2017)

Investment Series A Preferred Shares Investors Halcyon/Soryn
Quantity $15.3 million terms
  • Optional and Mandatory Redemption Provisions
  • Carry participation rights in revenue streams
  • Negative Events – Litigation and Treasury Related Events
  • Consent to declare dividends
Redemption rights Option of the company to repurchase at the lesser of:

1. 2.8 X the original purchase price
2. Buy price ranging from 1.2375X to 1.575+ times depending on the time elapsed from the issue date
3. Receipt of a share of litigation or license proceeds which varies based on time elapsed from date of issue

Source: https://www.sec.gov/Archives/edgar/data/0001366340/000136634017000059/0001366340-17-000059-index.htm

Based on its previous patent licensing success, Finjan likely had many traditional non-recourse litigation funding offerings to choose from. But instead of going the litigation funding route, Finjan went the IP credit route. Finjan secured nearly $26 million in funding, via two highly structured preferred stock transactions. These transactions included share repurchases related to litigation and/or patent licensing revenue events, and also contained “negative event” features that allowed the capital partner to recover all of its shares in the event of certain negative events agreed in advance. As illustrated in the chart above, potential returns to the financial partner were capped at multiples ranging from 1.25 to nearly 3 times the original purchase price of the shares, with the range depending primarily on how long the capital was in circulation.

Finjan eventually left both deals. Although the exact motivations for the agreement cannot be known, it is easily theorized that the highly structured and risk-protected nature of the IP credit agreement that the company ultimately entered into was favorable in several respects over the higher cost of capital seen in traditional litigation funding mechanisms. Finjan was eventually acquired by Fortress Investment Group in 2020.

Interaction with intellectual property litigation

It should be noted, and particularly with respect to patents, that enforcement litigation is often a necessary tool to resolve licensing disputes or negotiations between intellectual property owners and licensees. potentials. The reason for this is that without litigation, a patent holder has no means of forcing a party that they believe is infringing on their intellectual property to the negotiating table.

Litigation scenarios are therefore always part of the larger IP private credit strategy. But these disputes can take different forms and risk profiles. At one end of the risk spectrum are single-event litigation, involving a small number of patents, which represent unattractive and binary risk profiles. At the other end of the spectrum are multi-industry litigation, involving large numbers of patents, brought by entities with much larger patent portfolios than claimed in litigation.

These types of situations (shown above to the right of the arrow) are more like trade negotiations than binary disputes, and can be modeled to be resolved in a more predictable way. By the nature of a credit-focused investment strategy, an IP-focused private credit fund targets this latter set of opportunities, whereas the litigation funding market has shown a willingness to fund what we qualify as riskier and more binary type execution situations.

Therefore, while litigation is not necessarily a result of such an investment, a manager investing in the sector should expect, plan and prepare for litigation as a potential outcome, or at all less as a means to an end. The idea, as in most litigation, is that “sounder heads will prevail” and that a commercially reasonable settlement will be reached by both parties before embarking on costly litigation. Of course, this means the onus is on the investor to understand the merits of the case and the plaintiff’s strategic position, potential defenses, procedural activities that could frustrate or delay litigation, and the costs involved. are associated. The complexities associated with understanding the value of intellectual property assets and the complexity of the litigation process make the sector a highly specialized area for investors who are often best served by investing with or alongside specialist managers.

Slingshot Glimpses

Secular changes in the economy should force investors to think about value in different ways. It is indisputable that IP is clearly the basis of technology company valuations and therefore value must be attributable to IP when considering financing alternatives. While it can be difficult to understand the value inherent in intellectual property, fund managers with specific expertise exist to enable investors to allocate capital in an appropriate risk-adjusted manner.

The fact that the insurance industry is now offering IP-based insurance products is a testament to how far the industry has come and how big the opportunity, and perhaps much less risky one, is. think so, if approached with caution.

I think the IP Credit asset class has a bright future, as existing players have had great success producing consistent returns in a sector that one might otherwise think is volatile.

As always, I welcome your comments and counterpoints to those raised in this article.

Edward Truant is the founder of Slingshot Capital Inc. and an investor in the commercial and consumer litigation funding industry. Slingshot Capital Inc. is involved in the creation and design of unique opportunities in the legal financial markets, on a global scale, by investing with and alongside institutional investors.

Soryn IP Capital Management LLC (“Soryn”) is an investment management company focused on providing flexible financing solutions to corporations, law firms and universities that own and manage valuable intellectual property (“IP”) assets . Soryn’s approach uses strategies, including private credit, legal financing and specialized intellectual property financing, that allow it to invest in a diversity of unique intellectual property-centric opportunities through structured investments in the form of debt, stocks, derivatives and other financial contracts. Soryn’s team is comprised of seasoned intellectual property and investment professionals, enabling the firm to directly source opportunities less frequented by traditional alternative asset managers.

Follow us on social networks

About Edward Truant