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Intellectual Property as Fiduciary Security in Indonesia: Breakthrough or Challenge?

Intellectual Property

The creative economy or Ekonomi Kreatif (“Ekraf”) significantly boosts the national Gross Domestic Product (“GDP”). The growth of this sector is partly contributed by the protection of Intellectual Property (“IP”), which encourages innovation by rewarding creators through the use of their creation, among others as fiduciary security. The use of IP as fiduciary security is recognized in several regulations i.e., Law Number 28 of 2014 on Copyright (“Law 28/2014”), Law Number 13 of 2016 on Patents (“Law 13/2016”), Law Number 24 of 2019 on the Creative Economy or Undang-Undang Ekonomi Kreatif (“UUEK“) and Government Regulation Number 24 of 2022 (“GR 24/2022”), which further details this matter. The regulations open up access to financing for creative economy actors, allowing them to use IP as  fiduciary security. Despite the challenges in valuation and implementation, IP’s potential is poised to support national economic growth.

Creative Economy and Its Contribution to Indonesia’s Economy

Ekraf has become a strategic sector in Indonesia’s economy. This sector encompasses various industries that focus on creativity and innovation, such as art, design, music, film, and information technology. Quoting from the official website of the Ministry of Law and Human Rights of the Republic of Indonesia, the contribution of IP to the national GDP continued to increase in the 2019-2022 period. In 2019, IP contributed to IDR 1,105 trillion or about 7% of the average GDP, placing Indonesia in third place globally in Intellectual Property contribution, after the United States and South Korea. 1 IP plays a crucial role in protecting creative works and fostering innovation, granting creators exclusive rights to use, produce, and commercialize their works. IP protection enhances the added value of creative products, making them more competitive in the global market.

Intellectual Property

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Recognition of Intellectual Property as Fiduciary Security

Despite ascending to a position as a strategic sector in Indonesia, Ekraf still faces several challenges in its development e.g., promotional opportunities, infrastructure deficiencies, capacity building for creative economy actors and good synergy amongst stakeholders, which remain important areas for improvement. Limited access to banking services is another challenge that makes financing a significant hurdle. When seeking a loan, businesses are typically required to provide security to secure their debt obligations.

To overcome this financing issue, a significant breakthrough in Indonesia’s creative economy sector has been made through the enactment of UUEK and GR24/2022, which provide detailed guidelines for IP-based financing.  Under UUEK and GR24/2022, the concept of using IP as fiduciary security, which is already recognized in Law 28/2014 and Law 13/2016, is reinforced and expanded by providing more comprehensive regulations.

GR 24/2022, specifically Article 7, paragraph (2), outlines the requirements for obtaining IP-based financing in Indonesia, as follows:

  1. Submitting a Financing Proposal: Creative economy actors must prepare a proposal detailing their financing needs and objectives, how the funds will be used, and potential returns on investment.
  2. Owning a Creative Economy Business: Applicants must have an established creative economy business with growth potential. This business must be legally registered and have evidence of legitimate economic activity.
  3. Having a Binding Agreement on the Intellectual Property of Creative Economy Products: The IP used as fiduciary security must be licensed out to another party.
  4. Possessing an Intellectual Property Recording Certificate or Intellectual Property Certificate: Applicants must have official documents recording or certifying IP ownership, such as a patent, trademark or copyright certificate.

To be used as fiduciary security, IP must meet the four specific requirements mentioned above to ensure that the IP has clear economic value and legal standing, allowing financial institutions to accept it as a valid and reliable security asset

However, the implementation of these IP-related regulations, particularly regarding the IP valuation mechanism, facess challenges. The economic value of IP must be objectively measurable for it to function effectively as security. This is critical as to ensure that the IP can adequately cover the borrower’s debt and at the same time complies with regulatory requirements that require the value of IP to be recorded upon registration as security. As for IP valuators, according to GR 24/2022, valuators must be certified in accordance with regulatory requirements to assess IP value. Therefore, we believe that developing specific guidelines and ensuring the availability of certified IP valuators are critical to facilitating the effective use of IP as fiduciary security.

Challenges in the Implementation

To date, the implementation of these regulations has not been visible. Despite efforts to use IP as fiduciary security, several obstacles and challenges hinder the realization of this financing scheme. Key challenges include:

  1. Lack of Valuation Guidelines: As discussed in the previous section, a major challenge in implementing IP as security is the valuation of the IP’s economic value. Currently, there are no established and widely recognized valuation guidelines for IP. These guidelines are crucial to provide a basis for objective valuation of security acceptable by financing institutions. Given the complex and diverse nature of IP, developing these guidelines requires involving various experts in IP and the creative economy.

    As for the valuation of IP, according to Article 12 paragraph (1) of GR 24/2022, IP valuation can be conducted through three main approaches:

    • Cost Approach: This approach valuates IP based on the cost needed to replace or replicate the asset, often used for software or artworks.
    • Market Approach: This approach valuates IP based on market transactions of similar assets, often used for trademarks and copyrights.
    • Income Approach: This approach valuates IP based on potential future revenue generation, suitable for patents that can generate royalties or licensing revenue.

      In addition, there is also a valuation approach, which may serve as an additional alternative if the previous three approaches are ineffective in determining the value of IP.

      However, as mentioned, the authorized valuators for all of the above approaches must meet certain criteria as stipulated in Article 12 paragraphs (2) and (3) of GR 24/2022.

  2. Lack of Valuation Institutions: Article 12 paragraph (3) of GR 24/2022 stipulates that IP valuation must be conducted by valuators meeting certain criteria: a) having a public appraiser license, b) being competent in IP valuation, and c) being registered with the ministry overseeing the creative economy. Although there are acknowledged public valuators, their competence in IP valuation is a separate matter that requires validation in practice. In contrast to countries such as Singapore, with institutions like IP Value Lab (IPVL), and Australia, with the Australian Valuation Office (AVO), Indonesia currently lacks operational institutions dedicated to IP valuation, despite existing regulations.
  3. Execution of IP as Fiduciary Security: Another significant challenge is the execution mechanism for IP in case of default. When the debtor is in default, and the security is to be enforced, the procedures for executing IP and the institutions assisting with the execution are still unclear. Given the intangible nature of IP, this execution process is more complex than that of conventional security, like property or vehicles.

Intellectual Property

Compatibility of Intellectual Property as security with the Fiduciary Security Law Framework

Article 9 of GR 24/2022 states that financing institutions can use IP as security for debt. Eligible IP must be registered or recorded with the ministry overseeing legal and IP matters.

However, in addition to the key challenges discussed in the previous section, this regulation still lacks sufficient explanation regarding the mechanism for using IP as fiduciary security. Therefore, even though Law 28/2014 and Law 13/2016 allow IP such as copyrights and patents to be used as fiduciary security, this concept remains unfamiliar to the financial services sector. As a result, financing institutions are still hesitant to accept IP as security due to difficulties in assessing and ensuring its economic value. 2

Meanwhile, in the banking system, credit security typically involves assets with a clear value executable in case of default. The 5C principles (Character, Capacity, Capital, Security, Condition) and the 7P principles (Personality, Party, Purpose, Prospect, Payment, Profitability, and Protection) are used by banks to appraise creditworthiness. IP, as an intangible and challenging-to-valuate asset, presents unique challenges in this system.

Legally, GR 24/2022 allows IP to be encumbered as fiduciary security. However, in practice, financing institutions need to ensure there are clear and reliable mechanisms for appraising and managing IP as security. Without clear mechanisms, financing institutions will remain hesitant to accept IP as credit security.

Suitability of Intellectual Property in the Fiduciary Security Framework

Assessing whether IP meets all the elements of fiduciary security based on Law Number 42 of 1999 on Fiduciary Security (Undang Undang Jaminan Fidusia, UUJF“) is crucial for understanding the implementation of IP as fiduciary security. The UUJF states that fiduciary security is a transfer of ownership rights based on trust, with the object remaining in the owner’s possession. IP as fiduciary security meets this definition because even though ownership rights are transferred in a fiduciary capacity, the original owner can still use the IP.

According to Article 9 of the UUJF, fiduciary security can be granted on movable property, both tangible and intangible, as well as immovable property. Thus, in theory, IP as an intangible asset, such as patents and copyrights, qualifies as fiduciary security. Additionally, the accessoire and droit de preference nature of fiduciary security gives the fiduciary recipient the right to prioritize debt repayment over the execution of security. IP as fiduciary security must be executable under these principles, which, in theory, is possible but requires further technical regulations to ensure its liquidity in case of execution.

Intellectual Property

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Best Practice: Intellectual Property as Fiduciary Security

Developed countries, like Singapore, have successfully implemented IP as fiduciary security. Singapore has IP valuation institutions such as American Valuation Singapore, Consort Intellectual Asset Management, and Deloitte & Touche Financial Advisory Services, which play a role in accurately appraising IP, thereby helping banks decide the amount of funds to lend. 3

Singapore also has a structured financing scheme with institutions like IP Value Lab (IPVL) and Participating Financial Institutions (PFIs) playing a crucial role in appraising creditworthiness and providing IP-based loans. PFIs conduct due diligence to ensure the IP used as security has sufficient value to be secured.4 We believe that this kind of model can be adopted in Indonesia by establishing specialized valuation institutions, structured financing schemes, and collaboration between the government, banks, and valuators.

Collaboration with banks is another essential aspect. Singapore appoints major banks like DBS, OCBC, and UOB to provide credit with IP security. In our view, Indonesia can follow this approach by designating certain banks ready and capable of handling IP-based credit. Public awareness and education are also key to Singapore’s success, where the government actively promotes and educates creative economy actors on the importance of IP and how to utilize it as security. 5

As mentioned earlier, before the enactment of the UUEK and GR 24/2022, Indonesia had already established the basis for using copyrights and patents as fiduciary security through Law 28/2014 and Law 13/2016. However, to ensure effective implementation in the current context, more detailed technical guidelines are essential to support and facilitate the practical use of IP as security.

Towards Effective Implementation

In our view, to ensure the effective implementation of IP as fiduciary security, further steps are needed in providing valuation infrastructure and supportive regulations. Financing institutions need clear technical guidelines on accepting and valuating IP as security. The government must also ensure public valuators receive adequate training and certification, and develop valuation standards specific to IP.

We believe that the involvement of various stakeholders, including the government, creative industries, financial institutions, and public valuators, is essential in building an ecosystem that supports the use of IP as fiduciary security. Thus, the creative economy industry in Indonesia can advance further and contribute significantly to national economic growth.

In our assessment, developing a secondary market for IP is also necessary. This market will allow IP to be traded, thereby providing liquidity for this type of IP and giving financial institutions more confidence in accepting IP as security.

With a clear legal framework and collaborative efforts from all stakeholders, challenges in IP valuation can be overcome, thus enabling the effective implementation of GR 24/2022 and providing tangible benefits for creative economy actors in Indonesia.

We contend that by addressing these challenges and implementing the proposed strategies, Indonesia can effectively utilize IP as a valuable source of security, expanding financing opportunities for businesses and promoting economic growth.

For further questions or consultations on this matter, please do not hesitate to contact us at ADCO Law.


About ADCO Law:

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Disclaimer: This article has been prepared for scientific reading and marketing purposes only from ADCO Law. Accordingly, all the writings contained herein do not constitute the formal legal opinion of ADCO Law. Therefore, ADCO Law should be held harmless of and/or cannot be held responsible for anything performed by entities who use this writing outside the purposes of ADCO Law.