Entrepreneurs who've despaired of finding equity financing will have something to look forward to this summer -- a change in the law aimed at making loans to high-tech companies more attractive to lenders.
The law in question is Article 9 of the Uniform Commercial Code, the section that sets out the rules on collateral other than real estate. While it's fine for loans secured with machinery, inventory, or accounts receivable, the section, drafted in the 1970s, doesn't work well for intellectual property. Who would have dreamed in 1972 of accepting a URL as collateral -- and how, exactly, might a lender have taken a security interest in one?
The result has been that some lenders remain disinclined to make any loans against intangible assets, says Steven Weise, a Los Angeles attorney who worked on the revision. Those that do so run up costs by creating multiple documents to protect their interest -- costs that are passed along to the borrower -- and then lend far less than they would against conventional assets because of uncertainties in the law.
LOWER COSTS? The existing code, for example, has no provisions at all for licensing. A company that wants to borrow against licensing revenues must do so under general contract, a far more complicated legal process than having a lender simply file a financing statement with the secretary of state. It's not clear under the current law whether the lender has to notify licensees of the security interest, for instance, or whether, in the event of bankruptcy, the license fees go to the lender or the bankruptcy court.
The new law simply expands the category of accounts receivable to include licensing fees, a step that makes loans secured by intellectual property "more efficient, easier and clearer," according to Weise, who adds: "That should mean costs down and the amount of lending goes up."
The revised code modernizes other areas, too. For example, lenders now file a financing statement where a company does business and, just to be safe, also where it is headquartered. The new law makes clear it is now necessary to do so only in the state of incorporation. Another interesting change: Borrowers will be able to use pending lawsuits as collateral. "It's up to the lender to decide what they're worth," says Corinne Cooper, editor of The New Article 9 (American Bar Assn. Section of Business Law), a book on the code revisions.
To date, 28 states and the District of Columbia have adopted the revised Article 9. It will go into effect July 1. By then, the National Conference of Commissioners on Uniform State Laws expects almost every state to have approved the measure. By Fred Strasser in New York