Priority on demand registrations: Overview, definition, and example
What is priority on demand registrations?
Priority on demand registrations refer to the rights of certain shareholders or parties in a securities offering to have their shares registered before others. Typically found in agreements involving private placements or initial public offerings (IPOs), this provision gives certain investors the ability to demand that their securities be included in a registration statement filed with securities regulators, often ahead of other shareholders. This priority ensures that those investors can sell or transfer their securities to the public by registering them with the relevant regulatory authorities, usually for liquidity purposes.
For example, in a venture capital investment, a shareholder may have the right to request that the company register their shares first, allowing them to sell their shares during an IPO or another public offering.
Why is priority on demand registrations important?
Priority on demand registrations are important because they provide certain shareholders or investors with a better opportunity to sell their shares in the public market, ensuring that they can liquidate their investments when necessary. This provision is often negotiated by early investors, such as venture capitalists or private equity firms, who may have contributed significant capital to a company and want to ensure that they can cash out when the company goes public or conducts an offering.
For companies, offering priority on demand registrations may be part of the negotiation process to attract investors, as it provides those investors with a clear path to liquidity. However, it also comes with the responsibility to file the necessary registration statements and comply with securities laws.
Understanding priority on demand registrations through an example
Imagine a technology startup that is preparing for an IPO. Early investors, such as venture capitalists, have negotiated the right to demand that their shares be registered first when the company files its registration statement with the Securities and Exchange Commission (SEC). As the IPO approaches, the venture capitalists exercise their right to demand registration, allowing them to sell their shares to the public as part of the offering. The other shareholders, such as employees and later-stage investors, must wait for their shares to be registered after the priority shareholders have been addressed.
In another case, a private company agrees to grant certain large shareholders, such as institutional investors, the right to demand priority registration in the event of a future secondary offering. These investors can exercise their right to have their shares included in the offering before others, ensuring they have the opportunity to sell their holdings in the public market.
An example of a priority on demand registrations clause
Here’s how a priority on demand registrations clause might appear in an investment agreement:
“In the event that the Company registers any of its securities for an offering, the holders of Class A shares shall have the right to demand that their shares be registered first, ahead of other shareholders, subject to the terms and conditions outlined in this Agreement.”
Conclusion
Priority on demand registrations are a key provision in securities law and investment agreements, granting certain shareholders or investors the ability to have their shares included in a public offering before others. This provision provides liquidity options for investors, particularly those who have contributed capital early on. For companies, offering this right is a way to attract investors, though it also carries the responsibility of ensuring proper compliance with securities regulations. This mechanism is vital for ensuring that investors can capitalize on their investments during key moments such as IPOs or secondary 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.