Some companies don’t allow investors to sell their shares at the time of public offering. Registration rights help such investors and entitle them the ability to make a company publicly list the shares so that the investor can sell them. Private companies issue shares to the investors in order to raise money.
A Registration Right Agreement is an agreement between an investor and a company (Issuer) that allows the investor to register shares with the Security Exchange Commission in the US. it is only after the registration the investors are allowed to sell their shares.
When Is Registration Rights Agreement Needed
Registration Rights Agreement is required when the investors and some other shareholders want to sell their shares and want to gain access to the broader market. This is a way for the shareholders against the private and restricted shares.
Once the registration rights are exercised, it can force a privately-held company to become a publicly-traded company. The whole process impacts the company as it will first have to go for Initial Public Offering process which is an expensive affair, so if the company is at its early state, it can try to negotiate.
Purpose Of Registration Rights Agreement:
- To register a company’s share with the Security Exchange Commission
- To allow the shareholders and investors for selling their share
- To make a company go public with its shares
Inclusions In Registration Rights Agreement
Registration Rights Agreement is required to include the names of all investors who have the right to register their shares and reasons behind them. It will also mention the date on which the registration rights will be effective. In addition, it should be noted that the agreement must include the terms under which an investor will not be allowed to perform the registration rights.
Other key inclusions are the rules and time of registration process, provision for indemnification, etc. The information of governing law, Rule 144 and security act of 1993, etc are also mandatory inclusions.
SEC requires an SEC Form S-1 which is the initial registration form for new securities for public companies in the U.S. Companies file SEC Form S-1 in anticipation of their initial public offering (IPO). This form includes the information of capital proceeds, detail of the current business model and competition and a brief prospectus of the planned security itself.
How to Draft Registration Rights Agreement?
Registration Rights are of two types. All the parties involved, especially the private shareholders must know about them. One is demanding rights and the other is piggyback rights. Demand rights allow the investors to force a company to go public while piggyback rights allow for the investors to have their shares included in a liquidity event. Typically, larger shareholders receive demand registration rights, while piggyback rights are granted to a broader group of investors.
Before drafting the Registration Rights Agreement, shareholders must also anticipate the impact that an IPO is going to have on the company. They must also look at the market placement of the share in order to better anticipate the profit they are going to have due to selling of shares.
Benefits of Registration Rights Agreement
There are many hidden benefits of The Registration Rights Agreement. For example, the shareholders can also sell their shares pursuant to Rule 144 of the Securities Act of 1933, which provides an exemption from registration requirements. Rule 144 can be useful but it comes with many conditions.
More Advantage of Registration Rights Agreement –
- Can allow liquidating the investors’ shares through a public offering
- Mostly it is a three-way agreement but only two of the three parties (Issuer and underwriter) negotiate and sign it
- Allows shareholders to sell their private or restricted shares
- Exit vehicle for the minority shareholders
- Can make a company go public
- Allows the registration of a company’s share with the Security Exchange Commission
Key Clauses in Registration Rights Agreement
- Securities Act of 1933
- Rule 144
- Obligations of Holders of Shares that can be registered
- Obligations of the company
- Governing law
- Injunctive relief
What Happens When You Violate Registration Rights Agreement?
It is not enough for a company to have an IPO because it doesn’t ensure immediate public trade of all shares. Some shares may require a separate registration in order to be sold. Registration rights exercised after an IPO, can force a company to register a new class of shares with the SEC.
It must be noted that the registration rights can’t be practiced anytime the shareholders want. The length of the waiting period varies but, in most cases, it is more than a year. This is also the reason why a company is not compelled to go public and shareholders can’t force the company even after a long period of time if shareholders are not in the majority. Company and shareholders remain protected by the security act, in case of any violation, action can be taken as per the governing laws.
Sample Registration Rights Agreement
Registration Rights Agreement is a complex piece of documentation that requires an expert’s suggestions and guidance. Here is a sample created by our trusted experts, you can download it and customize it as per your need.
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