Tokenized Secured Notes

Core principle: A secured note combines a repayment obligation with rights against specified collateral. Tokenization supports its digital representation and administration; the financing documents and applicable law establish its protections.

What is a tokenized secured note?

A note is an instrument documenting a debt obligation. A secured note is a note supported by a security interest in specified collateral.

A tokenized secured note represents that investment digitally using blockchain or similar technology.

Party Role

Issuer or borrower Issues the notes and owes the stated payments

Investor or noteholder Holds the debt investment

Collateral owner or pledgor Grants rights in the collateral; may be different from the borrower Guarantor, if any Undertakes specified obligations if another party fails to perform Collateral agent or trustee, if appointed Holds or administers collateral rights for noteholders under the documents Administrator or paying agent Performs specified recordkeeping or payment functions Legal and financial advisers Evaluate structure, documentation, financial capacity, and disclosures A pledgor is the party providing collateral.

Why entity names matter

Suppose a parent issues notes, but a subsidiary owns the patents. The parent’s note alone does not establish a security interest in the subsidiary’s patents. The appropriate owner must validly participate in the collateral arrangement.

Discovery question: Which entity owes the debt, which entity owns the collateral, and what documents connect them?

Terms every SDR should understand

A straightforward secured note can provide financing without transferring an ownership percentage. This can help a company that wants to retain its existing ownership structure.

Tradeoff: The company accepts repayment obligations. Convertible notes, warrants, or other accompanying rights may introduce dilution.

B. Use assets to support financing

Assets that do not need to be sold immediately may support a borrowing arrangement. Tradeoff: Pledging an important asset can restrict later financing and expose that asset to enforcement following default.

C. Establish defined financing terms

The parties can specify payment dates, maturity, covenants, and other terms. Tradeoff: A predictable schedule is useful only if the company can meet it.

D. Retain potential business upside

If the note carries no equity participation, the owners may retain the business’s remaining upside after paying its obligations.

Tradeoff: Debt payments remain due even if business results fall below expectations, subject to the actual terms.

Potential benefits for investors

Potential benefit What supports it Important limitation

Defined payments Interest and repayment provisions Contractual payments may not be made Collateral rights Valid security arrangements Collateral may be insufficient or difficult to realize Creditor position Debt classification and applicable priority Other creditors may have superior or competing rights Information rights Reporting covenants Reports require reliable preparation and monitoring Negotiated restrictions Covenants limiting certain issuer actions Breaches still require detection and response Secured debt can provide rights unavailable to an ordinary shareholder. Actual recovery depends on the collateral, priority, other claims, and enforcement circumstances. [R23]

Repayment comes first; collateral is a separate protection

The team should investigate two questions separately:

• How will the company make scheduled payments?
• What might creditors recover if those payments fail? Possible repayment sources include operating cash flow, licensing receipts, or a planned asset sale. Refinancing may also be proposed, but future financing is uncertain.

Hypothetical example: A company owns patents appraised at $25 million but has little current cash generation. It proposes a $10 million note paying 8% annual cash interest.

Annual interest would be: $10,000,000 x 8% = $800,000 The appraisal does not establish that the company can produce $800,000 in annual cash interest or repay the principal at maturity.

Discovery question: What evidence supports the payment plan, including a scenario where commercialization takes longer than expected?

A simple payment example

Assume a hypothetical offering has these terms:

Item Assumption

Total principal $10 million

Annual interest rate 8%

Term 3 years

Interest payments Quarterly

Investor’s interest $25,000 x 8% = $2,000 annually $2,000 / 4 = $500 quarterly

Period Interest Principal repayment

Year 1 $2,000 $0

Year 2 $2,000 $0

Year 3 $2,000 $25,000

Total $6,000 $25,000

The investor would receive $31,000 across the period if every obligation were paid as assumed. Actual calculations depend on payment dates, day-count conventions, expenses, taxes, and the note terms. This example illustrates promised payments, not assured returns.

What can serve as collateral?

Potential collateral can include physical property, financial assets, and certain intangible or contractual rights.

A pledge of subsidiary shares differs from a direct pledge of the subsidiary’s assets. Similarly, rights in a patent, a license agreement, and royalty receipts are distinct. The documents must identify what is actually covered.

Attachment, perfection, and priority

These concepts explain different aspects of collateral protection.

A. Attachment: establishing an enforceable interest

Attachment concerns when the security interest becomes enforceable against the debtor concerning the collateral.

Under the general UCC framework, relevant conditions include value being given, the debtor having rights in the collateral or power to transfer rights, and an appropriate security agreement or another permitted arrangement.

[R24] SDR question: Has the legal team confirmed that the correct owner validly granted the required security interest?

B. Perfection: protecting the interest against competing claims

Perfection concerns additional legal requirements important to protection against other parties. Filing is a common method, but the required method depends on the collateral. Control, possession, or another applicable system may be relevant. [R25] A financing statement, commonly called a UCC-1, is a filing used in many secured transactions.

Creating a token or describing collateral in marketing material does not replace the required legal steps.

C. Priority: determining competing rights

Priority concerns which claim takes precedence when multiple parties claim the same collateral. UCC rules often consider filing or perfection timing, but exceptions and special collateral rules apply. [R26] SDR question: Are there existing liens, and has counsel confirmed the proposed investors’ position?

An intercreditor agreement is an agreement governing specified relationships among creditors, potentially including priority and enforcement rights.

IP recordation requires specialized review

The USPTO accepts certain documents concerning patent security interests for recordation. Such recording provides notice of relevant interests. [R27] That does not mean USPTO recordation alone establishes every element of attachment, perfection, priority, or enforceability.

Patent, trademark, copyright, license, and receivable arrangements can involve different requirements. Appropriate SDR language: Counsel will determine the documents, filings, and other steps required for the specific collateral.

Collateral value is not the same as recovery value An appraisal may assume continued commercial use. A creditor may instead need to sell rights following financial distress.

Recovery value is the amount actually available through the relevant recovery process. Simplified example: Assume:

• An IP portfolio was appraised at $20 million.
• Notes have $10 million outstanding principal.
• Following default, a sale produces $7 million.
• Enforcement and sale costs are $1 million.
• A senior creditor receives $2 million.
• The remaining $4 million is available to these noteholders.

The appraisal did not establish full recovery. Real distributions depend on the documents, applicable law, accrued obligations, and other claims.

What happens after default?

The documents establish events of default, notice requirements, cure opportunities, and available remedies. Possible responses include: Negotiating revised payment terms; Accelerating amounts due where permitted; Pursuing contractual claims; Enforcing collateral rights; Participating in restructuring or bankruptcy proceedings.

Restructuring means changing obligations or business arrangements to address financial difficulties. A default does not automatically cause every investor to receive title to part of the collateral.

Enforcement may require notices, decisions by an agent or trustee, legal proceedings, and compliance with applicable restrictions. Bankruptcy can further affect timing and remedies.

SDR explanation: Investors have the remedies established by the documents and applicable law. Recovery is a process, and its timing and amount cannot be promised.

Regulation A considerations

A secured note may be eligible for Regulation A, but eligibility requires analysis of the issuer and instrument. Regulation A permits specified debt securities and excludes asset-backed securities as legally defined in Regulation AB. A corporate borrowing secured by assets is not automatically classified as an excluded asset-backed security. [R01] The offering disclosures should accurately explain the payment terms, collateral, competing claims, enforcement arrangements, use of proceeds, and material risks.

The SDR collects information; the authorized specialists determine eligibility and prepare the offering.

When this structure deserves further evaluation

Prospect characteristic Question for review

Wants to retain ownership Can debt accomplish the objective without unsustainable obligations? Has recurring cash generation How resilient is payment capacity under adverse conditions?

Owns identifiable assets Are the rights available and suitable as collateral? Has existing borrowing What consents, restrictions, or priority arrangements apply?

Needs development capital Can it service debt before commercialization succeeds? Relies on refinancing at maturity What happens if new financing is unavailable?

A secured note can fit some business objectives well. Strong collateral claims and sustainable repayment capacity should be evaluated together.

SDR discovery checklist

Record the following for the specialist handoff:

Area Information needed