Struggling to secure a loan? Consider pledging your intellectual property.

In the current economic climate in South Africa and abroad, securing a loan or obtaining access to capital can be challenging. Yet many undertakings have a valuable asset that may assist in accessing capital, namely, intellectual property, notably trade marks. It is called “intellectual” because it is not tangible and that is, perhaps, why it is so often overlooked. Offering valuable intellectual property as security for a debt may help in obtaining a loan.

In a typical financing situation the borrower offers an asset as security for a loan and the lender secures the debt by recording a pledge over the asset. A delivery of property to a creditor has to be done as a security for a debt or for the performance of an act. This kind of practice is referred to as hypothecation whereby a natural person or a company/corporation pledges securities or other assets as collateral to secure a loan and/or to secure a debt. In a pledge, the borrower temporarily gives possession of the collateral to the creditor which hypothetically controls the collateral and who has the right to seize possession if the borrower defaults.

Many entrepreneurs may not be aware of the fact that intellectual property, more specifically registered trade marks can also serve as security for a debt/obligation. Branding has become commonplace and appreciated for the competitive advantages that it offers. It has become so well recognised that current accountancy practice requires intellectual property to be listed on balance sheet at valuation. Intellectual property is referred to as intangible assets which is distinguished from tangible assets, in that intangible assets are something of value that cannot be physically touched, for example, trade marks, patents, copyright and registered designs.

Turning the focus on trade marks, the South African Trade Marks Act, No. 94 of 1993, provides that a registered trade mark may be hypothecated by a Deed of Security, since a registered trade mark has always been viewed as incorporeal movable property and has been capable of attachment as it is of economical value and could be converted to cash.

The Deed of Security may also include future intellectual property to be pledged and hypothecated such as trade mark applications pending registration. Although the application for endorsement of the hypothecation will be lodged prior to the registration of the trade marks, the actual hypothecation will only be effected/endorsed in the Register of Trade Marks as soon as the trade marks are registered. To register the Deed of Security, an application must be made to the Registrar of Trade Marks in a prescribed form accompanied by a Power of Attorney in the name of the person or entity in whose favour the Deed of Security has been granted. The application must be accompanied by the Deed of Security itself or a certified copy thereof. The application must also be served on the registered proprietor of the trade mark / trade marks and any other person recorded in the Trade Marks Register as having an interest in the trade mark and proof of such service must be furnished to the satisfaction of the Registrar of Trade Marks.

As stated above, because recordal of the Deed of Security has the effect of a pledge, the principles relating to the law of pledge will therefore apply. The real right of security which the pledgee enjoys enables it to insist on the satisfaction of the principal obligation out of the proceeds of the subject matter of the pledge even against creditors of the pledge. The pledgee is therefore entitled to have preference in respect of the proceeds of the sale in execution.

It is therefore apparent that in pledges both parties, i.e., the pledgor and the pledgee have certain rights and liabilities. Although there is no standard form which the Deed of Security must take, it would be necessary to obtain expert advice from an intellectual property attorney as to whether the Deed of Security accords with the provisions of the South African law and to ensure that it will provide adequate protection to the pledgee. Generally, the content will set out the two parties involved, the debt or obligation in question, the terms and conditions of the contract of pledge, as well as a termination clause.

It would therefore appear that if an individual or corporation attempts to secure a loan and experiences difficulties in obtaining securities, such an individual or corporation may then rely on their registered trade marks which are of economic value and which could be converted to cash.

Other than using a registered trade mark as a pledge in securing a loan and/or obtaining capital for a corporation and/or individual purposes, there are various other advantages as to why one should consider to register a trade mark, namely:

  •  A registered trade mark confers upon the owner the exclusive rights to use that trade mark in respect of the goods and/or services for which it was registered, preventing the unauthorised use by others in the specific industry;
  • A registered trade mark serves as an official notice to others that the trade mark is no longer in the public domain and should another party adopt an identical and/or confusingly similar trade mark to the registered trade mark, they will not be in a position to claim ignorance of the mark;
  • As trade marks are territorial, the registered proprietor will receive nationwide (in the country of application) ownership of the mark;
  • As a registered owner the chances of becoming involved of potentially costly litigation are reduced in that a trade mark owner benefits from the presumption of being the valid owner of that mark; and
  • A registered trade mark could also be commercialised through licensing agreements, such as, franchising.

Date published: 2011/09/21
Author: Aletia Oberholster

Tags: loan intellectual property entrepreneurs