What Is Registration Right?
Registration Rights are an important part of corporate finance agreements. Registration rights are contractual rights granted to shareholders, which allow them to register their shares of a company for public sale with the Securities and Exchange Commission (SEC). This process, known as “going public,” involves the company filing a registration statement with the SEC.
Shareholders with registration rights can elect to register their stock at any time, regardless of whether the company is planning to go public or not. These rights are usually given to the investors who invest in the company during its early stages.
Additionally, registration rights help protect minority shareholders by providing them with the ability to monetize their shares. They also provide liquidity to shareholders, allowing them to sell their shares on the public markets. Also, registration rights can be used to help raise capital for the company when it does go public.
Piggyback and Demand Rights
Piggyback rights and demand rights are the two main types of registration rights. Demand registration rights give the investor the right to demand the company register its shares with the SEC. Once registered, the shareholders have the option to sell their shares to third parties and exit the company.
On the other hand, piggyback registration rights give the investor the right to include their shares in any registration that the company may do in the future, but only if the company or another stockholder initiates the process. In such a case, investors lack the same power as those who have demand registration rights.
Registration rights are an important tool for companies looking to go public. They provide a mechanism to ensure that shareholders retain the right to their shares, even if the underwriter exercises their right of first refusal.
However, registration rights come with their drawbacks as they can be costly and complex and may not be suitable for all companies. Companies should therefore carefully evaluate the costs and benefits of registration rights before deciding whether to incorporate them into the company’s IPO.