Piggy-back registration rights: Overview, definition, and example
What are piggy-back registration rights?
Piggy-back registration rights are a provision often included in investment agreements or shareholder agreements, which give certain shareholders the right to have their shares included in a public offering of securities, such as an Initial Public Offering (IPO) or a secondary offering. If the company registers its shares for sale, these shareholders can "piggy-back" on the registration, allowing them to sell their own shares in the offering without having to register their shares independently.
For example, if a company decides to go public and issue new shares, shareholders with piggy-back registration rights can sell a portion of their existing shares alongside the new issuance, allowing them to take advantage of the public offering.
Why are piggy-back registration rights important?
Piggy-back registration rights are important because they provide liquidity options for investors or stakeholders who own shares in a private company. This right ensures that they have the opportunity to sell their shares in a public market when the company registers its securities, often allowing them to realize a profit.
For businesses, offering piggy-back registration rights can attract investors by providing an exit strategy, while also ensuring that the company complies with securities regulations when shares are sold.
Understanding piggy-back registration rights through an example
A venture capital firm invests in a startup. The agreement includes piggy-back registration rights, meaning that when the startup goes public, the venture capital firm can include its shares in the IPO. This allows the firm to sell its shares along with the new public shares, maximizing its exit value.
In another example, a company plans a secondary offering of its shares after its IPO. The company’s existing shareholders, who hold piggy-back registration rights, are permitted to sell their shares in the secondary offering without going through a separate registration process.
An example of a piggy-back registration rights clause
Here’s how this type of clause might appear in an investment agreement:
“If the Company at any time proposes to file a registration statement for a public offering of its securities, the Company shall, at its expense, include the shares held by the Investor in such registration, provided that the Investor notifies the Company in writing within [X] days of its intent to sell. The Company will use commercially reasonable efforts to facilitate the registration of such shares.”
Conclusion
Piggy-back registration rights provide shareholders with a valuable opportunity to sell their shares during a public offering, improving liquidity and creating an exit strategy. For companies, offering these rights can help attract investors by giving them a pathway to realize the value of their investments in future public offerings. These rights also ensure compliance with securities laws when shares are offered for sale to the public.
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.