Demand registration: Overview, definition, and example
What is demand registration?
Demand registration is a right typically granted to shareholders, allowing them to request that a company register their shares with the relevant regulatory authorities (e.g., the Securities and Exchange Commission in the U.S.) so that they can be publicly offered and sold. This right is commonly included in shareholder agreements and allows investors to force the company to initiate a public offering of shares under certain conditions, typically after a specified period or if certain thresholds are met.
For example, a group of investors holding shares in a private company might have the right to demand registration of their shares if they want to sell them in the open market through a public offering.
Why is demand registration important?
Demand registration is important because it provides liquidity options for shareholders, particularly in private companies. Without this provision, shareholders may be unable to sell their shares or may face restrictions in transferring them. By enabling the sale of shares through a public offering, demand registration can increase the marketability of those shares, making them more valuable and liquid.
For businesses, granting demand registration rights can attract investors and allow the company to access capital markets, but it also requires careful management and compliance with securities regulations.
Understanding demand registration through an example
Imagine a private company that has issued shares to several investors. The shareholder agreement includes a demand registration clause, allowing any shareholder holding more than 5% of the shares to request that the company file a registration statement with the relevant authorities for a public offering of those shares. After a few years, one of the major shareholders exercises this right, triggering the company to file for a public offering to sell those shares on the stock market.
In another example, a company plans to go public through an initial public offering (IPO) but agrees to grant certain early investors the right to demand registration of their shares if they wish to sell them on the open market before the IPO.
An example of a demand registration clause
Here’s how a demand registration clause might look in a contract:
“If the holders of at least [insert percentage] of the Company’s outstanding shares request in writing that the Company file a registration statement under the Securities Act of [insert year], the Company shall, within [insert time period], file such registration statement to register the shares for sale to the public. The Company shall bear the costs of registration, except for the selling shareholder’s underwriting fees and commissions.”
Conclusion
Demand registration is a key provision in shareholder agreements that allows shareholders to request the registration of their shares for public offering, thereby increasing liquidity and providing opportunities for investors to exit. It provides a mechanism for shareholders to sell their shares on the open market when they choose, while also ensuring that the company complies with regulatory requirements.
By including clear demand registration provisions in shareholder agreements, businesses can offer shareholders flexibility while maintaining control over the timing and scope of public offerings.
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.