A trademark could provide collateral
Businessmen sometimes forget that intellectual property can provide value in a deal just like more substantial assets do
IN THE current economic climate 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 trademarks.
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 might help to get 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 security for a debt or for the performance of an act.
This is referred to as hypothecation, whereby a natural person or a company pledges securities or other assets as collateral to secure a loan or to secure a debt. In a pledge the borrower temporarily gives possession of the collateral to the creditor, who hypothetically controls the collateral and who has the right to seize possession if the borrower defaults.
Many entrepreneurs may not be aware that intellectual property, more specifically registered trademarks, can also serve as security for a debt or obligation. Branding has become commonplace and appreciated for the competitive advantages that it offers. It has become so well recognised that current accounting practice requires intellectual property to be listed on balance sheet at valuation.
Intellectual property is referred to as an intangible asset, something of value that cannot be touched physically — for example trademarks, patents, copyright and registered designs.
Turning the focus on trademarks, the South African Trade-Marks Act, 1993 provides that a registered trademark may be hypothecated by a deed of security, since a registered trademark has always been viewed as incorporeal movable property and has been capable of attachment as it is of economic 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 before the registration of the trademarks, the actual hypothecation will only be effected or endorsed in the Register of Trade Marks as soon as the trademarks are registered.
To register the deed of security, an application must be made to the Registrar of trademarks 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 trademark or trademarks and any other person recorded in the trademarks register as having an interest in the trademark, and proof of such service must be furnished to the satisfaction of the Registrar of trademarks.
As stated above, because the recording of the deed of security has the effect of a pledge, the principles relating to the law of pledge will 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, that is 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 accords with the provisions of the South African law and to ensure that it will provide adequate protection to the pledgee.
Usually 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 company may then rely on their registered trademarks that are of economic value and which could be converted to cash.
Other than using a registered trademark as a pledge in securing a loan or obtaining capital for a corporation or individual purposes, there are various other advantages as to why one should consider to register a trademark, namely:
A registered trademark confers upon the owner the exclusive rights to use that trademark in respect of the goods or services for which it was registered, preventing the unauthorised use by others in the specific industry;
A registered trademark serves as an official notice to others that the trademark is no longer in the public domain and should another party adopt an identical or confusingly similar trademark to the registered trademark they will not be in a position to claim ignorance of the mark;
As trademarks 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 in potentially costly litigation are reduced in that a trademark owner benefits from the presumption of being the valid owner of that mark; and
A registered trademark could also be commercialised through licensing agreements, such as franchising.