Assignment of registration rights: Overview, definition, and example
What is assignment of registration rights?
Assignment of registration rights refers to the process by which the holder of registration rights under a contract, such as a shareholder or investor, transfers those rights to another party. Registration rights are typically granted to investors in private placements or initial public offerings (IPOs) and give them the right to have their securities registered with the relevant securities authority, allowing them to sell those securities publicly.
When registration rights are assigned, the original holder (the assignor) transfers their ability to request the registration of their securities to another party (the assignee). This can be an important provision in investment agreements, as it enables the assignee to benefit from the same rights as the original holder, especially in the context of an IPO or secondary offering.
Why is the assignment of registration rights important?
The assignment of registration rights is important because it enables the rights to be transferred from one party to another, often in the context of business transactions or investment deals. It allows investors or shareholders to effectively "assign" the right to have their shares registered for public sale, which can be a valuable tool for accessing liquidity and maximizing the value of their investments.
For businesses, particularly those planning an IPO, this provision helps ensure that registration rights can be utilized by multiple parties, making the investment more attractive to potential investors. It also provides flexibility in managing the rights and obligations associated with securities.
For investors, the ability to assign registration rights ensures that they can pass on this valuable benefit to other parties, such as a successor or new investor, without losing the ability to sell their securities in the future.
Understanding assignment of registration rights through an example
Imagine a venture capital firm invests in a startup and is granted registration rights as part of the investment agreement. These rights allow the firm to request the registration of its shares with the SEC, so they can be publicly sold in an IPO. Later, the venture capital firm decides to assign its registration rights to another investor who has purchased a significant amount of shares from them.
In another example, a company that has issued shares to employees under an employee stock option plan (ESOP) grants registration rights to those employees. If an employee decides to transfer their shares to a new investor, the employee may also assign the registration rights to the new investor, allowing them to have the shares registered with the SEC when the company goes public.
An example of an assignment of registration rights clause
Here’s how an assignment of registration rights clause might look in an agreement:
“The Holder of Registration Rights may assign such rights to a transferee of the shares, provided that the transferee agrees in writing to be bound by the terms of this Agreement. The Holder shall notify the Company of such assignment, and the transferee shall have the same rights to request registration as the original Holder, subject to the terms of this Agreement.”
Conclusion
The assignment of registration rights is a key concept in investment agreements, particularly for private investors or shareholders seeking to sell securities publicly. By allowing the transfer of these rights, it provides flexibility and helps ensure that the original holder’s ability to sell their shares can be passed on to new investors or parties. This provision is essential for investors looking for liquidity options and for businesses aiming to maintain control over how and when their securities are publicly traded.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.