Investing in an Idea

Investing in an Idea

Investing in an Idea

By Jade Tang

A friend tells you that he has had a “brilliant idea” that will make him “millions. You wonder whether this idea could be commercialized and if so, how you can invest in it?

An idea by itself is rarely protectable but as soon as that idea can be transformed into intellectual property, that intellectual property can be protected.

The standard way of investing in an idea is for the related intellectual property to be transferred to a limited liability company which would then act as the joint venture vehicle between the creator of the intellectual property and any investors (“JV Co”).

Intellectual property rights (IPRs)

A mark or a logo that can, for example, be printed on a product, can be trademarked.

If there is a technique to produce a product, that technique could be patented.

If the idea is in written form, copyright will subsist in the writing.

Fashion designs can become registered designs in Hong Kong.

Registration of IPR – is it necessary?

Copyright automatically subsists in original literary or artistic works, sound recordings and broadcasts, typographical arrangement of published works, etc, so in many jurisdictions like Hong Kong, no express registration procedure is required to obtain copyright.

Patents, trademarks and registered designs do however need to be registered before they gain protection. Notably, registration of IPRs in one jurisdiction does not automatically grant protection in other jurisdictions. Therefore, if an IPR owner wants to protect his or her rights in multiple jurisdictions, he or she must ensure that the IPRs are registered with the appropriate authorities in all relevant jurisdictions.

Who is the owner of the IPR?

Usually the creator of the idea will be the legal owner of the IPR, but there are exceptions. For example, if the idea creator is an employee and creates the IPR during the course of his employment, such IPR would usually belong to the relevant employer.

Getting the IPR into a JV Co

One vehicle for investing in anything relating to IPRs is a JV Co.

Incorporating the JV Co and subscribing for shares is relatively straight forward. The key concern is that the IPRs are fully assigned to and then belong, unencumbered, to the JV Co. A formal assignment of the IPRs from the legal owner to the JV Co is essential.

The creator can execute a simple assignment in favour of the JV Co.

If the relevant IPR has already been registered with an intellectual property office, the JV Co will then have to apply for registration of the assignment of the IPR on the register. Even if the application for registration has not yet been completed, the JV Co still has to apply to the intellectual property office for registration of the assignment of the applied-for IPR so that the JV Co will replace the creator as the applicant for the registration.

By doing this, the JV Co will then be the legal and beneficial owner of the IPR. The IPR remains with the JV Co even if the creator ceases to be a shareholder of the JV Co in the future.

How to deal with shareholders’ interests?

If I am to invest in JV Co, I need to know that my interests will be protected. How do I do that? The standard methodology is a shareholders/joint venture agreement, which should specify relevant obligations, which may include:

  • That the creator shall work for the JV Co for a certain period of time to further develop the IPRs.
  • That the creator shall not transfer his shares in the JV Co to a third party without your consent.
  • That the creator shall not engage in other business activities which are in competition with the JV Co’s business.
  • That the capital injected into the JV Co shall not be used for the purposes other than the development of the business of the IPRs.
  • That if the JV Co needs additional capital for operations, the JV Co shall increase its share capital by allotment of new shares either:
    • to you (this will then dilute the creator’s shareholding); or
    • to all the shareholders (this will not affect the shareholding between you and the creator, but the creator has to additionally invest in the JV Co out of his own pocket).
    • Major decision affecting JV Co cannot be made without your consent.

How can OLN assist?

OLN can assist in the registration of the IPRs and then the preparation of all necessary commercial documents.

OLN can also assist in any necessary due diligence to ascertain the ownership of IPRs.

If the business is to be conducted through a joint venture company, then we can assist with setting up the limited liability company, the preparation of a shareholders’ or joint venture agreement and the assignment of existing IPRs in that new company.

We can also provide a strategic overview on all the above.

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.