Secured Convertible Promissory Note for South Africa

Secured Convertible Promissory Note Template for South Africa

This document is a comprehensive financial instrument used in South African business transactions that combines three key elements: a promissory note (debt instrument), security interest over specific assets, and the right to convert the debt into equity under specified conditions. It is governed by South African law, particularly the Companies Act 71 of 2008 and related financial legislation. The document details the loan amount, interest rates, repayment terms, security arrangements, conversion mechanics, and includes specific provisions for compliance with South African securities and corporate laws.

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What is a Secured Convertible Promissory Note?

The Secured Convertible Promissory Note is a sophisticated financing instrument used primarily in South African growth-stage companies seeking interim financing with the flexibility of future equity conversion. This document type is particularly valuable when companies need immediate capital but want to defer equity valuation discussions, or when investors seek the security of debt with potential equity upside. The note includes comprehensive details about the loan terms, security interests over company assets, and mechanisms for converting the debt to equity. It must comply with South African legislation, including the Companies Act 71 of 2008, Security by Means of Movable Property Act, and Financial Markets Act. The document typically bridges the gap between pure debt and equity financing, offering protection through security while maintaining conversion flexibility.

What sections should be included in a Secured Convertible Promissory Note?

1. Parties: Identification of the Lender(s) and Borrower(s) with their full legal details

2. Background: Context of the loan arrangement and purpose of the note

3. Definitions and Interpretation: Definitions of key terms and interpretation rules

4. Loan Amount and Interest: Principal amount, interest rate, calculation method, and payment terms

5. Security: Description of security/collateral and terms of the security interest

6. Conversion Rights: Terms and conditions for converting the debt to equity, including conversion price and mechanism

7. Repayment Terms: Payment schedule, prepayment rights, and default provisions

8. Events of Default: Circumstances constituting default and consequences

9. Representations and Warranties: Standard representations by both parties

10. Covenants: Ongoing obligations of the Borrower

11. Assignment and Transfer: Terms governing transfer of the note or rights thereunder

12. Notices: Communication requirements and contact details

13. General Provisions: Standard boilerplate clauses including governing law, jurisdiction, and amendments

What sections are optional to include in a Secured Convertible Promissory Note?

1. Subordination: Required if the note needs to be subordinated to other debt

2. Board Observer Rights: Optional rights for lender to observe board meetings, typically for larger investments

3. Information Rights: Additional reporting requirements beyond standard covenants

4. Tag-Along Rights: Rights of noteholder to participate in sale of company shares

5. Most Favored Nation: Protection ensuring the noteholder gets best terms offered to other investors

6. Anti-dilution Protection: Additional protection for conversion rights in case of share splits or similar events

7. Change of Control: Special provisions triggered by change in company ownership

What schedules should be included in a Secured Convertible Promissory Note?

1. Security Schedule: Detailed description of collateral and security arrangements

2. Conversion Mechanics: Detailed procedures and calculations for conversion to equity

3. Form of Conversion Notice: Template notice for exercising conversion rights

4. Repayment Schedule: Detailed payment schedule if installment payments are required

5. Company Information: Key company details including capitalization table and share structure

6. Permitted Encumbrances: List of permitted existing security interests or liens

7. Compliance Certificate: Template for periodic compliance certification by borrower

Authors

Alex Denne

Head of Growth (Open Source Law) @ Genie AI | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

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Promissory Note Form

A South African law-compliant financial instrument containing a written promise to pay a specified sum of money, governed by the Bills of Exchange Act.

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What is a Secured Convertible Promissory Note?

What sections should be included in a Secured Convertible Promissory Note?

What sections are optional to include in a Secured Convertible Promissory Note?

What schedules should be included in a Secured Convertible Promissory Note?

Authors

Alex Denne

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