IP Due Diligence for US IPOs: Patent and Trademark Risk Screening

The SEC’s Division of Corporation Finance has, since Q1 2025, increased the frequency of intellectual property (IP) comment letters in IPO registration statements, with a specific focus on patent validity and trademark territorial coverage. According to data compiled by Audit Analytics for the first half of 2025, 34% of all non-financial comment letters issued for US-listed IPOs from Chinese issuers (including Hong Kong and PRC-domiciled companies) contained at least one substantive query regarding IP ownership, chain of title, or litigation exposure. This represents a 12 percentage point increase from the same period in 2023. The shift aligns with the SEC’s broader enforcement of the Holding Foreign Companies Accountable Act (HFCAA) framework and the PCAOB’s enhanced inspection protocols for audit firms in mainland China and Hong Kong. For sponsors, legal counsel, and CFOs preparing a Form F-1 or S-1, the margin for error on IP disclosures has narrowed considerably. A single unresolved patent assignment or a trademark registration filed in the wrong jurisdiction can trigger a full stop in the SEC review clock, delaying the pricing window by 8-12 weeks. This article examines the specific risk categories, regulatory expectations, and procedural safeguards that issuers and their advisers must address when conducting IP due diligence for a US IPO.

The SEC’s Heightened Scrutiny of IP Ownership and Chain of Title

The SEC does not require a perfect IP portfolio, but it demands a complete and accurate disclosure of material IP assets and their ownership. Rule 10b-5 under the Securities Exchange Act of 1934, combined with Item 101 of Regulation S-K, obligates issuers to describe their principal products or services and the material patents, trademarks, licenses, and other intellectual property rights that are central to their business. Since 2024, SEC staff have consistently pushed back against issuers that provide generic statements such as “we own all necessary IP rights” without substantiating the chain of title from the inventor or original assignee to the issuer.

Joint Ownership and University License Risks

A recurring issue in IP due diligence for US-bound IPOs is the presence of joint ownership arrangements or licenses from academic institutions. Under US patent law (35 U.S.C. § 262), each joint owner can exploit the patent without the consent of the other co-owner, unless a written agreement specifies otherwise. For issuers that rely on patents developed in collaboration with a PRC university or a Hong Kong research institute, the absence of a clear licensing or assignment agreement creates a material risk that the issuer does not have exclusive control over its core technology. The SEC has issued comment letters in 2025 specifically requesting issuers to confirm whether any joint owner has the right to license the patent to third parties without the issuer’s consent. The Hong Kong Stock Exchange (HKEX) Listing Rules, Chapter 18A.04, similarly require biotech issuers to disclose all material IP licenses and confirm that the issuer holds the rights necessary to conduct its business. While the HKEX rules are not directly binding on US-listed issuers, the SEC staff often cross-reference the same disclosure standards in review letters.

Incomplete Assignment Records from PRC Inventors

Chinese patent law (Patent Law of the People’s Republic of China, as amended effective 1 June 2021) requires that any assignment of a patent or patent application between a PRC entity and a foreign entity be recorded with the China National Intellectual Property Administration (CNIPA). Failure to record the assignment renders the transfer ineffective against third parties. For issuers structured through a Cayman Islands or BVI holding company with a PRC operating subsidiary (a typical VIE or direct WFOE structure), the chain of title must trace from the individual inventor (often a PRC national) to the PRC subsidiary, and then to the offshore holding entity if the IP is held offshore. In practice, many pre-IPO companies have neglected to execute separate assignment agreements for each patent application, relying instead on employment contracts that state “all inventions belong to the company.” The SEC has rejected such blanket language as insufficient. In a 2024 comment letter to a Cayman-domiciled AI company, the SEC requested a “detailed table listing each material patent and patent application, the name of each inventor, the date of assignment, and the governing law of the assignment agreement.” Issuers should expect similar demands.

Trademark Clearance and Territorial Coverage Gaps

Trademark due diligence for a US IPO extends beyond the issuer’s home market. The SEC’s focus on trademark risk is driven by the requirement to disclose material legal proceedings under Item 103 of Regulation S-K, as well as the issuer’s description of its business under Item 101. A trademark that is registered in Hong Kong or mainland China but not in the United States does not, by itself, create a disclosure obligation. However, if the issuer plans to market its products or services in the US under the same brand name, the absence of a US federal registration creates a material risk of third-party infringement claims or USPTO refusals.

Common Law Rights vs. Federal Registration

US trademark law grants rights based on use in commerce, not merely registration. An issuer that has made sales in the US under an unregistered mark may have common law rights, but those rights are geographically limited to the specific regions where the mark has been used. For an issuer listing on the NYSE or NASDAQ, the SEC staff will examine whether the issuer’s trademark portfolio covers all material jurisdictions where the issuer currently operates or intends to operate within the next 12-24 months. If the issuer’s prospectus (招股書) describes a “global” or “US market expansion” strategy, but the trademark portfolio lacks US registrations, the SEC will likely request a risk factor disclosure explaining the potential inability to enforce the mark against third parties. The USPTO’s Trademark Trial and Appeal Board (TTAB) cancellation proceedings are a frequent source of material litigation risk for issuers that fail to conduct a comprehensive clearance search before filing their US trademark application.

Trademark Squatting in Key Jurisdictions

For issuers with a PRC operating history, trademark squatting is a systemic risk. The CNIPA operates on a first-to-file basis (Article 31 of the Chinese Trademark Law), meaning that a third party can register a trademark identical or similar to the issuer’s brand name without the issuer’s consent, provided the issuer has not used the mark in China. In 2023, the CNIPA received over 7.6 million trademark applications, according to the WIPO IP Statistics Data Center, making it the highest-volume trademark filing jurisdiction globally. For an issuer that has not registered its core brand name in China, the risk of a squatter filing a blocking application is material. The SEC has, in at least two 2024 comment letters to PRC-based issuers, requested disclosure of “any third-party trademark applications or registrations that could prevent the issuer from using its brand name in China or the United States.” Issuers should conduct a full trademark watch in the PRC, Hong Kong, the US, and any EU jurisdiction where they have a material presence, and include the results in the due diligence memo provided to underwriters.

Patent Validity and Freedom-to-Operate Analysis

The SEC does not require an issuer to prove that its patents are valid or that it has freedom-to-operate (FTO) in all markets. However, Item 303 of Regulation S-K requires management’s discussion and analysis (MD&A) of known trends and uncertainties that are reasonably likely to have a material impact on the issuer’s financial condition. A third-party patent that covers the issuer’s core technology creates a known uncertainty. If the issuer has not obtained a formal FTO opinion from qualified US patent counsel, the SEC staff will question whether the MD&A disclosure is adequate.

The Standard for “Material” Patent Litigation Risk

Patent litigation risk becomes material when the probability of an adverse outcome is substantial and the magnitude of potential damages or injunctive relief is significant. For issuers in the biotech, semiconductor, and software sectors, the SEC has applied a low threshold. In a 2025 comment letter to a NASDAQ-bound biotech issuer, the SEC requested a “detailed analysis of each patent identified in the FTO search that claims subject matter overlapping with the issuer’s lead product candidate, including the expiration date, the patent owner, and the basis for the issuer’s belief that it does not infringe.” The SEC also requested copies of the FTO opinion letters. Issuers should note that the SEC will treat a failure to conduct an FTO search as a disclosure deficiency, even if no third-party patent has been asserted.

Inter Partes Review (IPR) and Post-Grant Proceedings

For issuers that hold patents that have been challenged before the USPTO Patent Trial and Appeal Board (PTAB), the SEC will require disclosure of the IPR or post-grant review (PGR) proceeding as a material legal proceeding. The America Invents Act (AIA) of 2011 established the IPR process as a faster, cheaper alternative to district court litigation for challenging patent validity. Since 2020, the PTAB has instituted IPR in approximately 65% of petitions filed, according to USPTO statistics. For an issuer whose entire business model depends on a single patent family, an instituted IPR creates a material risk that must be disclosed in the prospectus. The SEC will also ask whether the issuer has indemnification rights from its founders or former shareholders if the patent is invalidated. Issuers should ensure that their due diligence includes a review of all PTAB proceedings involving their patents, as well as any patents that could be asserted against them.

Cross-Border IP Transfer and Regulatory Approvals

The intersection of IP due diligence with PRC regulatory approvals has become a critical checkpoint for issuers subject to the PRC Cybersecurity Law, the Data Security Law, and the Personal Information Protection Law (PIPL). The Cyberspace Administration of China (CAC) has, since 2022, required a cybersecurity review for any issuer that processes the personal information of more than one million PRC individuals and plans to list in a foreign jurisdiction. The scope of the review includes the transfer of any data or IP that could affect national security.

Technology Export Controls and the MIIT Regime

The Ministry of Commerce (MOFCOM) and the Ministry of Industry and Information Technology (MIIT) jointly administer the Catalogue of Technologies Prohibited or Restricted from Export (the “Technology Export Catalogue”), last updated in December 2023. If an issuer’s core technology falls within the restricted category, a technology export license from MOFCOM is required before the issuer can transfer the IP to its offshore holding company. In practice, many pre-IPO companies have executed IP licensing agreements between their PRC subsidiary and their Cayman or BVI parent without obtaining the required license. The SEC has, in 2024 and 2025, issued comment letters specifically requesting confirmation that all necessary PRC regulatory approvals have been obtained for the transfer of IP from the PRC to the offshore entity. Failure to obtain the license can result in the IP transfer being void ab initio under PRC law, exposing the issuer to a material risk of losing its core technology rights. Issuers should engage PRC counsel to prepare a detailed memorandum mapping each material IP asset to the relevant technology export classification.

Data Localization and IP Licensing Structures

For issuers in the fintech, healthcare, and e-commerce sectors, the PIPL and the Data Security Law impose restrictions on the cross-border transfer of personal information and “important data.” The CAC’s Measures for Data Cross-Border Transfer Security Assessment (effective 1 September 2022) require a security assessment for any data transfer that meets certain volume thresholds. If an issuer’s IP portfolio includes patents or trade secrets that incorporate personal information or important data, the issuer may need to restructure its IP licensing arrangements to ensure that the data remains within PRC borders while the legal ownership of the IP is held offshore. This is a complex structuring issue that requires coordination between PRC data counsel, US securities counsel, and IP counsel. The SEC will not accept a generic risk factor stating that “PRC regulations may affect our business.” The issuer must disclose whether it has obtained the required security assessment or data transfer certificate, and if not, the specific steps it is taking to achieve compliance.

Actionable Takeaways for Issuers and Their Advisers

• Conduct a complete chain-of-title audit for all material patents and patent applications, with individual assignment agreements executed by each inventor and recorded with the relevant national patent office (CNIPA, USPTO, or HKIPD) at least six months before the confidential F-1 or S-1 filing.
• Obtain a formal freedom-to-operate opinion from US patent counsel for the issuer’s lead product or service in every jurisdiction where the issuer has a material market presence, and include a summary of the opinion in the underwriting due diligence memo.
• File US trademark applications for the issuer’s core brand names in all classes of goods and services that correspond to the issuer’s business, and conduct a full clearance search in the USPTO database, the CNIPA database, and the EUIPO database before the first public filing.
• Engage PRC counsel to prepare a technology export classification memorandum for each material IP asset, and apply for any required MOFCOM or MIIT license at least 12 months before the anticipated IPO pricing date.
• Disclose in the prospectus risk factors any pending or threatened IP litigation, any IPR or PGR proceeding, and any failure to obtain required PRC regulatory approvals for cross-border IP transfers, with a specific quantification of the potential financial impact where reasonably estimable.