Business, Legal & Accounting Glossary
The right of a shareholder of restricted stock to force the company issuing the shares to register with the SEC, which will allow the shareholder to sell shares to outside investors. Without this right it would not be possible for restricted shareholders to easily divest themselves from the company.
Registration Rights are contractual rights that entitle investors to force a company to register the investors’ shares of company stock with the Securities and Exchange Commission (SEC) and state securities commissions. This registration, in turn, enables the investors to sell their shares to the public. Registration rights give investors liquidity by enabling them to free their shares from the transfer restrictions imposed on unregistered securities by the federal and state securities laws. Venture capitalists invariably require them as a condition of funding.
Registration rights come in two varieties: demand rights, which enable investors to require a company to register their shares for sale in public offering any time an investor demands; and piggyback rights, which allow investors to include (or “piggyback”) their shares in a public offering the company is already conducting.
Entrepreneurs often treat registration rights as a necessary evil and pay only cursory attention to the details of these agreements. This attitude can prove costly later on. Management should negotiate the registration rights agreement as it would any other important part of its financing arrangements. Some important issues management should address are
Most companies have no trouble giving an investor piggyback registration rights as long as his rights are subject to the veto of the company’s underwriter. Giving such rights does little to disrupt a company’s plans and does not require the special effort of demand registrations.
Demand registrations, however, do nothing for a company after the initial funding but do require it to undertake the expensive and time-consuming effort of conducting a public offering whenever the investor demands. These offerings require significant efforts from management, diverting them from the business of running the company. They can even depress the market price of the company’s stock if the offering is poorly timed. For these reasons, it pays to limit the demand registration rights as much as possible.
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This glossary post was last updated: 30th December, 2021 | 0 Views.