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The title and tone of this article make it sound unusual that the company used its IP as collateral. You can get better loan terms (such as the interest rate)

The title and tone of this article make it sound unusual that the company used its IP as collateral. You can get better loan terms (such as the interest rate) if your loan is secured. If you are going to get a secured loan, the default is that it's secured by 'all assets', which includes IP. In order to perfect a security interest in IP, you need to make this type of filing -- and a lender will be especially sure to do so when making a secured loan to this type of company because the company likely has little other assets of value with which to secure the loan.

strangeloops85 7y ago
Yes, I suppose the more salient thing here is that they did take out a large loan to meet their opex while (likely) trying to raise a rather large round to keep going and release the next device. I wonder if softbank's current precarity is causing some general difficulties, independent of Magic Leap's viability. The scale of their cash needs going forward are.. rather large
perspective1 7y ago
So did Magic Leap default, or is the loan newly made with JPM to hold the patents while the loan is outstanding? Seems like the IP in this case isn't very valuable to JPM* and this is more just another way to guarantee the seniority of JPM's loan. * Didn't read the patents themselves, but Oculus, Hololens and others are doing just fine without them. So, hard to imagine they have too much auction value.
- berberous 7y ago
  It looks like Magic Leap just closed on a new loan in August, not that they defaulted. This filing ensures that if they ever _do_ default, JPM has the rights it expects in the IP as collateral.
  - kguttag 7y ago
    I'm not a lawyer, but my understanding that the effectively J.P. Morgan now owns the patents (unless a court somehow unwinds the deal) and why the assignment was registered with the USPTO. The patents are then being licensed back to Magic Leap. In this way if Magic Leap defaults, J.P. Mogan simply owns the I.P. like if you pawn something and default on the payback terms.
    - ineedasername 7y ago
      It looks like the IP was simply collateral. So as long as Magic Leap repays the loan, they still own the IP. Well, as much as you own a house that has a mortgage anyway.
    - jonas21 7y ago
      At the very top of the PDF, it says this is a patent security agreement, which is a common way to use patents as collateral for a loan. JP Morgan will only own the patents if Magic Leap defaults on the loan. You can read more about patent security agreements here: https://www.ipwatchdog.com/2012/06/21/getting-a-loan-with-your-patents/id=25716/ https://www.ipwatchdog.com/2012/06/21/getting-a-loan-with-yo...
    - egdod 7y ago
      > The patents are then being licensed back to Magic Leap. Do you have any evidence for that idea, or are you just making things up?
    - berberous 7y ago
      No, this is a short-form IP security agreement that's customarily used by a secured lender to perfect its security interest in IP collateral. If you want more details, this page explains why these forms are necessary: https://www.whitecase.com/publications/article/perfecting-security-interests-united-states-patents-trademarks-and-copyrights https://www.whitecase.com/publications/article/perfecting-se.... Ownership does not transfer to the secured lender as a result of this filing.
  - cinquemb 7y ago
    There's HQLA like treasuries as collateral, and then there is Magic IP paper as collateral. Amazing collateral chain these days… anything to keep origination pipelines up, hopefully JPM can securitize enough of this and offload it to a yield chasing pension or something. Maybe the employees can sell what hasn't been collateralized yet on platforms like: https://softbankfiresale.com/ https://softbankfiresale.com/
paulsutter 7y ago
It’s common to pledge assets as collateral, but I’ve never seen patents actually assigned as a condition for a loan. This looks pretty strange.
- berberous 7y ago
  The patents were not assigned. JPMorgan merely recorded a security interest in the patents (although the USPTO does list this as an “assignment”, it’s not). This is completely customary for a secured loan. You sometimes see secured lenders forego this type of filing since it’s a bit of a pain in the ass, but for a company like magic leap, you would definitely want to do it since that’s where most of the value is. It’s hard to say more without knowing the terms of the loan. Perhaps they are struggling to raise more equity and had to resort to debt on bad terms, or perhaps it just made sense to raise debt instead of equity and they could do so on favorable terms.
- egdod 7y ago
  The title is probably wrong. At a quick glance, this looks like an ordinary security interest, not an assignment.
deleted 7y ago
[deleted]
kguttag 7y ago
Using patents to secure loans is not new. Most Famously Tesla did it. What makes it "news" is that Magic Leap was able to raise $2.6 Billion without having to resort to using the I.P. as collateral. It usually does not make the previous investors happy and you usually resort to this when you can't raise money any other way. It is also a one-trick-pony in that you can't do it again and future potential investors know that the I.P. is already gone if the company goes bust. They just announced a $280M investment from NTT Docomo, but base on my and other people's estimates, Magic Leap was running out of money while burning through about $600M/year so that only bought them about 5 months of runway.
- yo-scot-99 7y ago
  how would a bank evaluate the risk -- do they generally have an internal team or farm it out to a consultancy? they don't have the history or contacts like VC or google's invesment funds. meanwhile, they are playing footsie with saudia arabia again: https://www.youtube.com/watch?v=iDv2E22Mz0s&feature=youtu.be&t=9292 https://www.youtube.com/watch?v=iDv2E22Mz0s&feature=youtu.be...
  - pottertheotter 7y ago
    The big banks like this have their hands in everything and connections all over the place. They have their own VC funds, they have investment bankers who specialize in different areas of tech, and they often have their own tech bus dev people in Silicon Valley who are deeply networked with both company founders and VC firms. For a lot of startups, being able to put the JP Morgan/Chase logo on your website as a customer is huge. The founders and VCs know this.
    - baybal2 7y ago
      > The big banks like this have their hands in everything and connections all over the place. They have their own VC funds, they have investment bankers who specialize in different areas of tech, and they often have their own tech bus dev people in Silicon Valley who are deeply networked with both company founders and VC firms. For a lot of startups, being able to put the JP Morgan/Chase logo on your website as a customer is huge. The founders and VCs know this. And it was those very people that were selling their round A. Very competent people they were... :)
hogFeast 7y ago
The reason it makes headlines is because the value of IP is very volatile and bogus collateral is a very old scam (not only in banking btw, fake valuations are a feature of many scams). If I go to the park, pick up a rock, and then go to a bank and say there is diamonds inside worth $1m, and they lend against that then I have made $1m. If you lend against collateral, you are making a bet on the collateral being worth $X. JP Morgan have no idea what the IP is worth. And btw, what is Magic Leap? They have got billions from investors with no product, they have now got billions from JPM with no product...either they have some of the most valuable patents known to man or this is an almighty scam (to be honest, I always hope it is the former because you have to be an abhorrent human being to pull off the latter...but that never is the case).
- ekc 7y ago
  They released their product months ago.
  - iamaelephant 7y ago
    Did they? I googled "buy magic leap" and all I can find are dev units ("Creator Edition"). That's not a consumer product. That's a pre-requisite for a consumer product. Magic Leap have never released a product for general sale.
    - v64 7y ago
      You can buy a Magic Leap at https://shop.magicleap.com/ https://shop.magicleap.com/
      - mikekchar 7y ago
        Weird. The developer version is $500 more than the "personal version", but seems to include only the "Developer Hub" (apparently: "[...] a split cable that connects the computer to the power source to enable uninterrupted development time while charging") and support. Is there any other distinction?
flukus 7y ago
At least some of their key patents (https://patents.google.com/patent/US20130128230/en?oq=inassignee:%22Magic+Leap%2c+Inc.%22 https://patents.google.com/patent/US20130128230/en?oq=inassi...) are nearly halfway though there lifetime, so at best those patents will have a decade of value before they get a retail product out the door. It seems a bit like putting a decade old car up as collateral, sure it's got value but it's rapidly diminishing.
- egdod 7y ago
  Patents have value even if you never get a product out the door.
  - gumby 7y ago
    Patents can have value even if you never get a product out the door. Most patents are not worth the money spent getting them in the first place.
    - egdod 7y ago
      While it's true that most patents never get asserted or licensed, I suspect that in a pure sale, very few would go for less than the prosecution cost.
      - gumby 7y ago
        That has not been my experience, on both sides of a transaction. Sometimes massive libraries of patents are useful (I presume this is why google kept Motorola's patents when they sold the company off) simply because they can be brandished as a counter-weapon when a large company is threatened in a patent battle. But think of it as a sandbag: one grain of sand is negligible and few companies have more than a handful.
  - mikekchar 7y ago
    I was thinking about this... Let's say Magic Leap survives for another 2 years, then defaults. That gives you 8 years left on those key patents. It just doesn't seem like enough time to actually build something and sell it. So like you say, the only real value is in selling it to someone who would like it as part of a defensive portfolio (not too likely in my books)... or using them in a patent troll fashion (suing other people for patent infringement despite the fact that you never intend to use the patent yourself). My question is: Who does JPM think they would sue in this case to justify the value? I wouldn't think there were too many candidates to choose from (both in VR and have piles of cash that you can liberate)...
activeknowledge 7y ago
I couldn't possibly predict how Chase would act with that portfolio if ML failed to recover after this loan, but if past performance/decisions are any indication we'll probably find out very quickly. Important to note that this includes the series of ODG patents they acquired which cover a lot of early industrial AR applications. Wish I knew anywhere close to enough to hypothesize.
ChuckMcM 7y ago
I expect the title and tone reflects that Magic Leap had a history/reputation of being able to walk into a room and have money thrown at it for no reason at all, and now it can't do that. It also shipped in 2018 and has yet to file an S-1 for a public offering. Typically, once execution risk has been retired (i.e. you are shipping a product), and market risk (or fit) has been retired (i.e. you're getting more demand than you can fill) then you pour in money and grow the company. So they have been shipping for a year and don't have enough sales to be operationally cash flow positive, and they don't have a good enough story to convince investors that they can get to market success, and they need cash to continue operations. No, what this note/observation makes clear is that it's that time where either they figure out some problem where their technology has the most value, or they end up selling off the chairs and desks and try to return something to their investors after JP Morgan sells their IP to cover their last loan. Odds are its about to follow DAQRI[1] into the bin. [1] https://techcrunch.com/2019/09/12/another-high-flying-heavily-funded-ar-headset-startup-is-shutting-down/ https://techcrunch.com/2019/09/12/another-high-flying-heavil...
jonomacd 7y ago
The person who wrote this article has a well known vendetta against magic leap. So that explains that.

strangeloops85 7y ago

Yes, I suppose the more salient thing here is that they did take out a large loan to meet their opex while (likely) trying to raise a rather large round to keep going and release the next device. I wonder if softbank's current precarity is causing some general difficulties, independent of Magic Leap's viability. The scale of their cash needs going forward are.. rather large

perspective1 7y ago

So did Magic Leap default, or is the loan newly made with JPM to hold the patents while the loan is outstanding? Seems like the IP in this case isn't very valuable to JPM* and this is more just another way to guarantee the seniority of JPM's loan. * Didn't read the patents themselves, but Oculus, Hololens and others are doing just fine without them. So, hard to imagine they have too much auction value.

berberous 7y ago
It looks like Magic Leap just closed on a new loan in August, not that they defaulted. This filing ensures that if they ever _do_ default, JPM has the rights it expects in the IP as collateral.
- kguttag 7y ago
  I'm not a lawyer, but my understanding that the effectively J.P. Morgan now owns the patents (unless a court somehow unwinds the deal) and why the assignment was registered with the USPTO. The patents are then being licensed back to Magic Leap. In this way if Magic Leap defaults, J.P. Mogan simply owns the I.P. like if you pawn something and default on the payback terms.
  - ineedasername 7y ago
    It looks like the IP was simply collateral. So as long as Magic Leap repays the loan, they still own the IP. Well, as much as you own a house that has a mortgage anyway.
  - jonas21 7y ago
    At the very top of the PDF, it says this is a patent security agreement, which is a common way to use patents as collateral for a loan. JP Morgan will only own the patents if Magic Leap defaults on the loan. You can read more about patent security agreements here: https://www.ipwatchdog.com/2012/06/21/getting-a-loan-with-your-patents/id=25716/ https://www.ipwatchdog.com/2012/06/21/getting-a-loan-with-yo...
  - egdod 7y ago
    > The patents are then being licensed back to Magic Leap. Do you have any evidence for that idea, or are you just making things up?
  - berberous 7y ago
    No, this is a short-form IP security agreement that's customarily used by a secured lender to perfect its security interest in IP collateral. If you want more details, this page explains why these forms are necessary: https://www.whitecase.com/publications/article/perfecting-security-interests-united-states-patents-trademarks-and-copyrights https://www.whitecase.com/publications/article/perfecting-se.... Ownership does not transfer to the secured lender as a result of this filing.
- cinquemb 7y ago
  There's HQLA like treasuries as collateral, and then there is Magic IP paper as collateral. Amazing collateral chain these days… anything to keep origination pipelines up, hopefully JPM can securitize enough of this and offload it to a yield chasing pension or something. Maybe the employees can sell what hasn't been collateralized yet on platforms like: https://softbankfiresale.com/ https://softbankfiresale.com/

paulsutter 7y ago

It’s common to pledge assets as collateral, but I’ve never seen patents actually assigned as a condition for a loan. This looks pretty strange.

berberous 7y ago
The patents were not assigned. JPMorgan merely recorded a security interest in the patents (although the USPTO does list this as an “assignment”, it’s not). This is completely customary for a secured loan. You sometimes see secured lenders forego this type of filing since it’s a bit of a pain in the ass, but for a company like magic leap, you would definitely want to do it since that’s where most of the value is. It’s hard to say more without knowing the terms of the loan. Perhaps they are struggling to raise more equity and had to resort to debt on bad terms, or perhaps it just made sense to raise debt instead of equity and they could do so on favorable terms.
egdod 7y ago
The title is probably wrong. At a quick glance, this looks like an ordinary security interest, not an assignment.

deleted 7y ago

[deleted]

kguttag 7y ago

Using patents to secure loans is not new. Most Famously Tesla did it. What makes it "news" is that Magic Leap was able to raise $2.6 Billion without having to resort to using the I.P. as collateral. It usually does not make the previous investors happy and you usually resort to this when you can't raise money any other way. It is also a one-trick-pony in that you can't do it again and future potential investors know that the I.P. is already gone if the company goes bust. They just announced a $280M investment from NTT Docomo, but base on my and other people's estimates, Magic Leap was running out of money while burning through about $600M/year so that only bought them about 5 months of runway.

yo-scot-99 7y ago
how would a bank evaluate the risk -- do they generally have an internal team or farm it out to a consultancy? they don't have the history or contacts like VC or google's invesment funds. meanwhile, they are playing footsie with saudia arabia again: https://www.youtube.com/watch?v=iDv2E22Mz0s&feature=youtu.be&t=9292 https://www.youtube.com/watch?v=iDv2E22Mz0s&feature=youtu.be...
- pottertheotter 7y ago
  The big banks like this have their hands in everything and connections all over the place. They have their own VC funds, they have investment bankers who specialize in different areas of tech, and they often have their own tech bus dev people in Silicon Valley who are deeply networked with both company founders and VC firms. For a lot of startups, being able to put the JP Morgan/Chase logo on your website as a customer is huge. The founders and VCs know this.
  - baybal2 7y ago
    > The big banks like this have their hands in everything and connections all over the place. They have their own VC funds, they have investment bankers who specialize in different areas of tech, and they often have their own tech bus dev people in Silicon Valley who are deeply networked with both company founders and VC firms. For a lot of startups, being able to put the JP Morgan/Chase logo on your website as a customer is huge. The founders and VCs know this. And it was those very people that were selling their round A. Very competent people they were... :)

hogFeast 7y ago

The reason it makes headlines is because the value of IP is very volatile and bogus collateral is a very old scam (not only in banking btw, fake valuations are a feature of many scams). If I go to the park, pick up a rock, and then go to a bank and say there is diamonds inside worth $1m, and they lend against that then I have made $1m. If you lend against collateral, you are making a bet on the collateral being worth $X. JP Morgan have no idea what the IP is worth. And btw, what is Magic Leap? They have got billions from investors with no product, they have now got billions from JPM with no product...either they have some of the most valuable patents known to man or this is an almighty scam (to be honest, I always hope it is the former because you have to be an abhorrent human being to pull off the latter...but that never is the case).

ekc 7y ago
They released their product months ago.
- iamaelephant 7y ago
  Did they? I googled "buy magic leap" and all I can find are dev units ("Creator Edition"). That's not a consumer product. That's a pre-requisite for a consumer product. Magic Leap have never released a product for general sale.
  - v64 7y ago
    You can buy a Magic Leap at https://shop.magicleap.com/ https://shop.magicleap.com/
    - mikekchar 7y ago
      Weird. The developer version is $500 more than the "personal version", but seems to include only the "Developer Hub" (apparently: "[...] a split cable that connects the computer to the power source to enable uninterrupted development time while charging") and support. Is there any other distinction?

flukus 7y ago

At least some of their key patents (https://patents.google.com/patent/US20130128230/en?oq=inassignee:%22Magic+Leap%2c+Inc.%22 https://patents.google.com/patent/US20130128230/en?oq=inassi...) are nearly halfway though there lifetime, so at best those patents will have a decade of value before they get a retail product out the door. It seems a bit like putting a decade old car up as collateral, sure it's got value but it's rapidly diminishing.

egdod 7y ago
Patents have value even if you never get a product out the door.
- gumby 7y ago
  Patents can have value even if you never get a product out the door. Most patents are not worth the money spent getting them in the first place.
  - egdod 7y ago
    While it's true that most patents never get asserted or licensed, I suspect that in a pure sale, very few would go for less than the prosecution cost.
    - gumby 7y ago
      That has not been my experience, on both sides of a transaction. Sometimes massive libraries of patents are useful (I presume this is why google kept Motorola's patents when they sold the company off) simply because they can be brandished as a counter-weapon when a large company is threatened in a patent battle. But think of it as a sandbag: one grain of sand is negligible and few companies have more than a handful.
- mikekchar 7y ago
  I was thinking about this... Let's say Magic Leap survives for another 2 years, then defaults. That gives you 8 years left on those key patents. It just doesn't seem like enough time to actually build something and sell it. So like you say, the only real value is in selling it to someone who would like it as part of a defensive portfolio (not too likely in my books)... or using them in a patent troll fashion (suing other people for patent infringement despite the fact that you never intend to use the patent yourself). My question is: Who does JPM think they would sue in this case to justify the value? I wouldn't think there were too many candidates to choose from (both in VR and have piles of cash that you can liberate)...

activeknowledge 7y ago

I couldn't possibly predict how Chase would act with that portfolio if ML failed to recover after this loan, but if past performance/decisions are any indication we'll probably find out very quickly. Important to note that this includes the series of ODG patents they acquired which cover a lot of early industrial AR applications. Wish I knew anywhere close to enough to hypothesize.

ChuckMcM 7y ago

I expect the title and tone reflects that Magic Leap had a history/reputation of being able to walk into a room and have money thrown at it for no reason at all, and now it can't do that. It also shipped in 2018 and has yet to file an S-1 for a public offering. Typically, once execution risk has been retired (i.e. you are shipping a product), and market risk (or fit) has been retired (i.e. you're getting more demand than you can fill) then you pour in money and grow the company. So they have been shipping for a year and don't have enough sales to be operationally cash flow positive, and they don't have a good enough story to convince investors that they can get to market success, and they need cash to continue operations. No, what this note/observation makes clear is that it's that time where either they figure out some problem where their technology has the most value, or they end up selling off the chairs and desks and try to return something to their investors after JP Morgan sells their IP to cover their last loan. Odds are its about to follow DAQRI[1] into the bin. [1] https://techcrunch.com/2019/09/12/another-high-flying-heavily-funded-ar-headset-startup-is-shutting-down/ https://techcrunch.com/2019/09/12/another-high-flying-heavil...

jonomacd 7y ago

The person who wrote this article has a well known vendetta against magic leap. So that explains that.