Participation in underwritten registrations: Overview, definition, and example
What is participation in underwritten registrations?
Participation in underwritten registrations refers to a shareholder’s right to include their shares in a public securities offering that is underwritten by an investment bank. This typically applies to existing investors or stakeholders in a company that is going public or conducting a secondary offering. The underwriter, usually an investment bank, facilitates the sale of shares to the public while managing pricing and market demand.
For example, if a private investor owns pre-IPO shares in a company planning an initial public offering (IPO), they may have the right to participate in the offering and sell their shares alongside the company’s newly issued shares.
Why is participation in underwritten registrations important?
Participation in underwritten registrations is important because it provides liquidity to existing investors, allowing them to sell shares in a structured and managed offering. It also ensures that major shareholders and early investors have an opportunity to monetize their holdings without negatively impacting the offering’s market dynamics.
For businesses, setting clear rules for investor participation in underwritten registrations helps maintain control over the public offering process, prevents oversupply of shares, and protects the company’s stock price stability.
Understanding participation in underwritten registrations through an example
Imagine a venture capital firm invested in a startup before it went public. When the startup launches its IPO, the firm wants to sell a portion of its shares as part of the offering. If their investment agreement includes participation rights in underwritten registrations, they can register their shares alongside the company’s and sell them at the IPO price, benefiting from the underwritten sale process.
In another scenario, a company conducts a secondary offering to raise additional capital after its IPO. Some early investors and company executives have the right to participate in the offering and sell their shares, provided they follow the underwriter’s guidelines on pricing and allocation.
Example of a participation in underwritten registrations clause
Here's an example of how a participation in underwritten registrations clause may look like in a contract:
"In the event that the Company conducts an underwritten registration, any Shareholder holding registrable securities shall have the right, subject to underwriter approval, to participate in such registration by including their shares, provided that the total number of shares offered does not exceed the amount deemed reasonable by the underwriters."
Conclusion
Participation in underwritten registrations gives existing investors the opportunity to sell their shares as part of a public offering, ensuring liquidity while maintaining market stability. By defining participation rights in agreements, businesses and investors can manage share sales efficiently, align with market conditions, and protect the success of the offering.
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.