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IP due diligence

In early-stage FinTech businesses

Introduction

Our research findings explain why the majority of large businesses in the sector are struggling to move quickly enough, and how that can be changed.  Most importantly, our findings tell us how the industry’s leaders are learning to reach hyper-speed.

One of key findings is that when carrying out due diligence on a potential FinTech partner there is no substitute for spending time getting to know the founders and other senior staff in person. Asking the founders to describe their technology development cycle and their approach to compliance gives a much clearer view of the risks presented by an early stage business than asking them to fill in a 200 page procurement questionnaire and provide a raft of policies that they may never have read.

Nowhere is that more true than in relation to intellectual property (‘IP’).

What does that mean for your organisation?

Whether partnering with, investing in or acquiring early-stage FinTech businesses, it is highly advisable to consider conducting some level of due diligence in respect of the IP used by the business in question.  This is particularly the case with FinTech businesses whose main focus is developing software for financial institutions and asset managers (e.g. RegTech, data analytics, AI, distributed ledger, cybersecurity systems or technology).  In many cases, the IP assets of the business will be the key driver behind the partnership or investment.  It makes sense to check that it is going to be possible to exploit the technology fully without any IP skeletons appearing out of the closet, especially when even proof of concept projects can involve the financial institution investing hundreds of thousands of pounds.

When carrying out due diligence on a potential FinTech partner or target, there is no substitute for spending time getting to know the founders and other senior staff in person.  Discussing the technology development cycle face-to-face with the people who wrote the code gives a much clearer view of the IP risks involved than you would get from reviewing a long list of responses to standard-form information requests.

Key IP due diligence questions to consider are:

  • What is the IP comprised of (e.g. software, source code, algorithms, databases, copyright in manuals, etc.) and where is it located?
  • Who developed the IP and what is their relationship to the business (i.e. are/were they employees or contractors and where are/were they located when they developed the technology)?  The position on ownership of IP developed by employees and contractors differs from country to country.
  • If a contractor (rather than an employee) developed the IP (or any part of it), did they sign a contract with the business which assigned the IP to the business?
  • How long did it take to develop the existing IP?  Consider whether any pre-existing ‘background’ IP might have been used to speed up the process.  If so, who owns that background IP and did the business have the right to use it?
  • Have the individuals who developed the IP developed similar IP previously, and if so, when and for whom?  Depending on the answer to this question, further due diligence may be required – e.g. in what way is the technology similar, and did the previous work contribute to the development of the new technology in terms of development time and quality?
  • When thinking about software, how much of the code base is open source?
  • Have any of the individuals who developed the IP worked together previously, and if so when and for whom?
  • Has the developer or business received any complaints from third parties regarding its IP (e.g. threatening IP infringement and/or breach of confidence/trade secrets)?
  • Is there any know-how that needs to be recorded by the developers (or any other key personnel) to facilitate your understanding of and ability to operate the IP if the project doesn’t go ahead (in the case of a partnership) or the original developers leave the business (in the case of an investment or acquisition)?

If you are responsible for signing off on a partnership or investment in an early-stage FinTech business one of the most important question you can ask is – “has anybody asked the questions above?”.

How can we support you?

Our IP team regularly advises on the IP risks associated with partnering with, investing in or acquiring early-stage FinTech businesses.

Recently the team has advised:

  • the strategic investment team of an international bank on a minority investment in an early-stage data analytics software developer
  • an international bank on the establishment of a joint venture with two other financial institutions and three FinTech businesses to develop a new RegTech solution
  • the British Business Bank on its consultancy role for HM Treasury under The Small and Medium Sized Business (Finance Platforms) Regulations 2015 regarding the designation of alternative finance platforms
  • an early stage FinTech business that spun its IP out of a US investment bank on its proof of concept projects with a number of financial institutions
  • the London Bullion Market Association on the IP licences relating to the new LBMA Gold, Silver and Platinum & Palladium Price benchmarks

We have also advised on investments in some of the best known FinTech businesses in the UK including: Zopa, Seedrs, Wonga, Bullion Vault and Borro.

About the data:

On behalf of Simmons & Simmons, Longitude Research launched an online survey at the beginning of January 2017 and, over a 3 month period, conducted a series of independent one-on-one interviews to investigate and understand the strategies that large institutions in the financial services industry are pursuing to accelerate their digital innovation. We received 200 responses (as well as conducting 9 in-depth interviews), from senior individuals at international banks (both investment and retail) and asset managers.  Of the 200 responses, 26% are from UK (London), 25% Germany (Frankfurt), 24% USA (New York) and 25% from Asia (Hong Kong and Singapore).

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