The Intangible Economy

In the Intangible Economy1, there are four factors of production that are the key resources from which economic activity and competitive advantage are primarily derived and delivered:

• knowledge assets (what people know and put into use)
• collaboration assets (with which people interact to create value)
• engagement assets (the level of energy and commitment of people)
• time quality (how quickly value is created).

IPCI (Intellectual Property and Critical Information) is at the heart of any modern company. In actuality it represents the most valuable assets a company has. Yet, according to modern accounting principles, most IPCI either has no book value (such as IP developed in-house), or is carried on the books as a de minimis asset hidden in goodwill.

For example, under current rules, if you developed the trade name Oreo™ inhouse, you can only place it on your books at the cost of prosecution of the application; around US$35. Clearly the value is much higher. This missing higher value is, in part, reflected in the goodwill and the history of retained earnings.

It is also true that the value of IPCI is constantly changing. The value of a particular “nugget of wisdom or folly”, as a rule, decreases over time, but also may have greatly differing values in different commercial applications and environments. Further, if the IPCI is not actively protected from loss and infringement, it loses value. The time, effort, and expense used to create its value are considered essentially wasted.

If you will, this ‘currency of the mind’ is very valuable. Many international structures now are IPCI banks or holding companies, whereby a person or a company lodges a portion or all of their IPCI and then licenses that IPCI out to the world. Ideal candidates for this structure are those who are the drivers of the digital age, such as authors, publishers, musicians, and record labels. Famous persons can migrate their portraiture rights to such a structure. Software and Broad Application Patents are also good choices, as are widely known trade names and trade marks.

However, the choice of jurisdiction is of paramount importance, as is the protection of the IPCI from infringement or piracy. It appears, for now at least, that the jurisdiction of choice is the Netherlands. The Netherlands offers excellent movement of IPCI, since it has been aggressively structured as a hub for IPCI. Furthermore, since the Netherlands has tax treaties with most major nations, remittances can be harvested from many countries without domestic withholdings. The Netherlands also has an IPCI-friendly court system, where most cases can be heard by the courts in as little as eight weeks; try that in the US!

The internationalisation of IPCI, while very desirable in terms of portability, profitability, and flexibility, does, however, carry some pitfalls that must be addressed.

• The domicile in which the IPCI was generated may have some export control issues, and one may need to seek government approval for transfer/sale of the IPCI. Recently a company that specialised in the biological digestion of chicken manure was denied the sale of its IPCI since it may contain biological pathogens that could be used against the host country. No one understood that ruling, but it ended the sale/transfer.
• The transfer/sale of the IPCI may be subject to a taxable gain in the country of origin. If one were to generate a valuable name such as Oreo™ and transfer the name to an international entity, in all likelihood there would be a taxable gain in the country of origin that would have to be addressed.
• The IPCI transferred may be unique and unassailable in the country of origin, but, as it is to be licensed internationally, it may impinge on similar pre-existing IPCI in other countries.

The last area of concern is that the IPCI must remain exclusive to the owner and the authorised licensees. As long as the IPCI is exclusive, it has value, but once it becomes diffuse, it is of little use.

•   70 per cent of the value of a modern company comes from IPCI. If the IPCI is compromised, it will have to be written down, or even written off.
•   Most corporations have active competitive intelligence (CI) programmes to harvest
•   other company’s IPCI. Thus, the IPCI may, or may not be more vulnerable in an international structure.
•   The end of the Cold War saw a shift from military to economic intelligence gathering.

It is incumbent upon the managers of these international IPCI structures, not only to monitor the licensing of these assets, but also to monitor potential infringement of the IPCI assets. The only proven way to do this is a process called OPSEC; a developed process for identifying, valuing, and protecting information that would give adversaries, those who want your IPCI, an advantage.

IPCI is the currency of the future. It is more fluid than cash and often more intangible and powerful than the djinn of the deserts. It is imperative that we in the international finance community become more literate about and familiar with IPCI, so that, in time, our knowledge and skills can provide value and support to this intangible currency.

1 The Industrial Age began in Britain in the 18th and 19th Centuries. The Information

Age is roughly from the 1980s to 1992. Knowledge Economy started in 1992, and continued to 2002. The Intangible Economy started in 2002.

L. Burke Files DDP CACM
Mr. Files is an international financial investigator and due diligence expert who has run cases in over 130 countries and has visited over 100 countries. Mr. Files has tackled investigations running from a few hundred thousand dollars to over 20 billion. Along the way, he became familiar with the knowledge of what people need to do, for due diligence, preventing corruption, and to avoid helping criminals launder money. He brings this experience of hands-on investigating and problem-solving experience to his lectures on Due Diligence, AML, and Anti-Corruption. Prior to founding FE&E, Inc., he served as the Director of Corporate Finance for American National an investment bank focused on development stage venture capital. He was also employed by Oppenheimer/Rouse as a commodities specialist trading customer accounts in Agri-Business, 24-hour gold and silver, and foreign currencies. Mr. Files has authored six books, and many white papers and articles. He has been quoted in major publications including The Guardian, The Financial Times, Forbes, US Newsweek, and more. He is the author of the award-winning book Due Diligence For The Financial Professional 2nd Edition. Mr. Files serves on the board of directors for several private companies, funds, and non-profits. The companies include Unicus Research a specialty advisory service for fund managers and family offices, SGS Glazing a specialty glazing design and estimating firm, and NSI a premium spirits company.