Question
From: (redacted)
Sent: Friday, April 15, 2005 1:41 PM
To: Verne, B. Michael
Subject: Sale of rights to a royalty stream
Michael,
Following up on our discussion earlier this week, Jon wanted me to check withyou regarding an two additional wrinkles.
Given the transaction discussed below (assuming size of person and/or size oftransaction thresholds are met), where a party purchases a right to apercentage of royalties, is there any potential reporting requirement triggeredif the purchasing party also takes a security interest in the underlying IP? Inother words, if a Buyer pays consideration in exchange for (1) a securityinterest in IP, and (2) rights to royalties paid for that IP, is there apotential reporting requirement premised on the acquisition of the securityinterest?
Our understanding is that the rules would not capture the acquisition of thesecurity interest because the Seller would retain beneficial ownership of theIP, unless and until the Seller defaulted on paying forward the appropriateshare of royalties to the Buyer.
As a secondary matter, (again assuming size of person and/or size oftransaction thresholds are met) in the event the Seller does default, and theBuyer exercises the rights in the security interest to obtain the IP, wouldthat subsequent acquisition constitute a reportable acquisition of assets?Section 802.63 suggests that the acquisition would be exempt. However, in thisscenario, the Buyer is not a bank, but is a private investment organization.Would this acquisition meet the requirement of being a "creditor in a bonafide credit transaction entered into in the ordinary course of business?"Do you need to know more about the Buyer's activities to answer this questions?Please let me know.
Our primary concern is with the issue of acquiring the security interest, butit would be nice to know if the buyer in this transaction would be subject toreporting requirements in the event of a subsequent default.