No registration rights: Overview, definition and example
What are no registration rights?
"No registration rights" refers to a provision in a contract or agreement that explicitly states the holder of certain securities, such as shares or warrants, does not have the right to require the issuer to register those securities with a regulatory body, such as the U.S. Securities and Exchange Commission (SEC). Registration rights typically allow security holders to sell their securities publicly by obligating the issuer to file a registration statement. By including a "no registration rights" clause, the issuer limits or eliminates the holder's ability to demand such registration.
This provision is often used in private placement agreements, shareholder agreements, or early-stage investment contracts to define the rights and limitations of security holders.
Why is no registration rights important?
The "no registration rights" provision is important because it clarifies the issuer's obligations and limits the expectations of security holders regarding the resale of securities. For issuers, it prevents the administrative burden and costs associated with registering securities. For investors or security holders, it provides transparency about their inability to publicly sell the securities without additional steps, such as relying on exemptions under securities laws.
By clearly outlining the lack of registration rights, the clause minimizes misunderstandings and disputes, particularly in private placements or restricted securities transactions.
Understanding no registration rights through an example
Imagine a startup raises capital by selling shares to private investors through a private placement. The investment agreement includes a "no registration rights" clause, meaning the investors cannot require the startup to register their shares with the SEC. The investors understand that they must comply with securities laws, such as holding the shares for a certain period or using an exemption, before reselling them.
In another example, a company issues warrants to a strategic partner as part of a commercial agreement. The warrants include a "no registration rights" provision, ensuring that the company is not obligated to register the shares underlying the warrants, limiting the partner’s ability to publicly trade the shares without additional legal steps.
An example of a no registration rights clause
Here’s how a "no registration rights" clause might appear in an agreement:
“The Holder acknowledges and agrees that the Securities issued under this Agreement do not carry registration rights. The Issuer shall have no obligation to file a registration statement or facilitate the public resale of the Securities. The Holder further acknowledges that the Securities are subject to restrictions on transfer under applicable securities laws.”
Conclusion
The "no registration rights" provision is a critical clause for issuers who want to limit their obligations regarding the public resale of securities. It ensures clarity about the restricted nature of the securities and sets realistic expectations for investors. Including this provision in agreements helps protect issuers from undue administrative burdens while providing transparency and compliance with securities laws.
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.