Creating Security over Intellectual Property (IP) Assets in the UAE: Current Practice
Technology, Media & Telecoms Focus
The value of ‘Intellectual Property’ (“IP”) as both an asset class and a contributor to the United Arab Emirates’ economic growth has considerably expanded in recent years, not only in the telecoms, media and technology (“TMT”) sectors, but beyond.
Law Update: Issue 368 - Technology, Media & Telecoms Focus
Dina Al-WahabiSenior Associate,Banking & Finance
The value of ‘Intellectual Property’ (“IP”) as both an asset class and a contributor to the United Arab Emirates’ economic growth has considerably expanded in recent years, not only in the telecoms, media and technology (“TMT”) sectors, but beyond. In parallel, facilitating the ease with which a UAE business can leverage the value of their IP as collateral for borrowing purposes (whenever commercially relevant) has been impacted by the changes to the modern security interest framework in the country.
To grasp the speed of growth and scale of IP value, consider that earlier in 2024, the Ministry of Economy’s (“MOE”)’s figures revealed a nearly 30% year-on-year (“YOY”) increase since 2023 in registrations of intellectual works, including a nearly 20% YOY increase in patent applications, a 13.7% increase in registered patents (since 2022) and a nearly 10% YOY increase in applications for trademark registrations.[1] Globally, the UAE ranks as the only Arab country among the top 15 leading exporters of IP (based on the most recent data from 2021), with over $3.2 billion of IP value exported, ahead of Australia, India, Brazil and Türkiye, for example.[2] Viewed from a different perspective, this alone suggests that the net present value of the UAE’s IP assets are likely to be several multiples of its annual IP exports. This is an asset base that could be included amongst collateral options when financing is being considered by a business’ management.
Currently, Federal Law No. 4 of 2020 on security rights over moveable assets (the “Moveables Law”) provides a legal mechanism for using IP (and other intangible assets) as collateral. Still, at least for IP, it remains a relatively new area in the UAE given the key commercial challenges inherent to working with IP assets in many jurisdictions: the market’s overall unfamiliarity with intangible asset financing, the complexity of valuation (particularly for non-monetised IP), the opacity of secondary markets (for divestment of stand-alone IP) and the costs of due diligence for assessing each of these challenges. For now, the challenges are therefore more about the market at-large and less about the legal regime itself. To address these concerns, however, the UAE has been working collaboratively with the World Intellectual Property Organisation (“WIPO”) to explore how best to establish a comprehensive approach to unlock the potential of IP financing for its businesses.[3]
It is reasonable to expect that there will be various initiatives in the coming years to further encourage the use of IP as part of non-equity financing. Until then, taking security over various classes of tangible assets secured under the Moveables Law is already established practice by market participants in the UAE, whilst taking security solely over IP is gradually emerging. A summary overview of the substantive and procedural requirements to organise such collateral is explained in the following sections.
Article 3 of the Moveables Law provides that any moveable assets, whether currently existing or existing in the future, may be secured under the Moveables Law. Among other things, bank accounts, tangible goods and receivables may be secured under the Moveables Law. Intellectual property may also be secured by way of a commercial pledge created pursuant to Federal Law No. 50 of 2022 (“Commercial Code”). The Commercial Code allows a mortgage to be created over tangible and intangible assets and the intangible assets may include contacts, goodwill, trade name, right to lease and industrial and intellectual property and licenses.
So how to discern the correct law to secure intellectual property?
Importantly, Article 4 of the Moveables Law provides that a security interest over a moveable asset that is capable of being registered under a special register is exempt from the provisions of the Moveables Law. For intangibles, securing trademarks and patents in the UAE under the Commercial Code can be undertaken by way of registering the security agreement with the MOE. Accordingly, a line can be drawn between trademarks and patents – to be registered with the MOE and secured in accordance with the Commercial Code – and all other intellectual property, which can be secured under the Moveables Law.
In relation to registering the security agreement with the MOE, the following points should be noted:
Only UAE trademarks and patents can be registered with the MOE; that is to say, trademarks or patents registered outside the UAE or unregistered trademarks or patents or other types of intellectual property or intangible assets cannot be registered with the MOE; and
In the context of a finance transaction, the UAE security agent and security provider will need to monitor the expiration date of each of the UAE trademarks and patents because the registrations will only be valid during the life of that trademark or patent. In this respect, it may be helpful to include an undertaking in the security agreement compelling the security provider to renew the trademarks and patents registration as permitted by law, and security registration, prior to their expiration.
As an initial step, the security agent will need to have an account with the MOE portal to allow it to register the moveables security agreement.
In the UAE, similar to a pledge over shares of a limited liability company, a pledge over the intangible property must first be notarised prior to submitting it to the MOE for registration. According to the MOE’s website, the average duration for service delivery is 40 days from the date of the application. Therefore lenders would need to be cognisant of the time required to complete the notarisation and the registration process when considering whether the registration with the MOE is a condition precedent (“CP”) or a condition subsequent (“CS”) to funding the loan.
At the time of publication of this article, fees payable to the MOE amounted to AED 1,250 service fee for registering the security agreement together with an AED 750 fee (per trademark) for publication of the security in the official trademark bulletin. Hence, if there is a large portfolio of trademarks and patents the cost could be significant.
It is common for lenders to take a wide pool of security and a lender may wish to also secure other classes of intangible assets such as copyrights, software, know-how, customer lists trade secrets and royalties and the like. These examples of intangible assets may be secured under the Moveables Law by way of a security agreement which is perfected by registration on the Collateral Register administered by the Emirates Integrated Registries Company (“EIRC”).
The security agreement can be registered on the EIRC as a CP which will provide the lender with a registered security interest. It is also possible to create security over patents, trademarks and collateral capable of being secured under the Moveables Law (for example alongside bank accounts and tangible goods) in the same security agreement. In this respect, once the security agreement has been registered on the EIRC, the lender can arrange for it to be notarised so that the security agreement may then be registered with MOE at the CS stage.
The Moveables Law has been essential in advancing the UAE’s legal regime for moveable asset security. Lenders would want to due diligence the pool of intangible assets early enough in the credit assessment process to understand how the split between the Moveables Law and Commercial Code would apply and the impact on the transaction. Future developments of a knowledge economy in the UAE and creation of intellectual property are expected particularly with the recent launch of new initiatives by the MOE designed to foster home grown creators and inventors. Understanding how to assist creators in financing intellectual property to enable further growth is essential to strengthen and reinforce the application of the legal framework.
[1] UAE Ministry of Economy, 2024
[2] Bonaglia, D. and Wunsch-Vincent, S., World Intellectual Property Organisation (WIPO), Global Innovation Index, 31 May, 2023
[3] Gokulan, Dhanusha, “WGS 2023: WIPO’s new financing toolkit can help UAE businesses raise capital by keeping IP as collateral” Gulf News, 15 February, 2023
For further information,please contact Dina Al Wahabi.
Published in May 2024
