Priority on secondary registrations: Overview, definition, and example
What is priority on secondary registrations?
Priority on secondary registrations refers to the order in which investors, shareholders, or other stakeholders are given the right to sell their shares or securities in a secondary market offering. This priority determines who gets to sell first when demand is limited, often benefiting early investors or preferred shareholders.
For example, if a company allows existing shareholders to sell stock in a secondary offering, those with priority rights may be able to sell their shares before others, ensuring they secure a sale at a favorable price.
Why is priority on secondary registrations important?
Priority on secondary registrations is crucial because it protects the interests of key investors and ensures a fair and structured approach to selling securities in secondary markets. It helps manage liquidity, reduce market disruptions, and provide transparency on who has the right to sell first.
For SMBs considering fundraising through equity sales, setting clear rules on secondary registrations can help maintain investor confidence and prevent disputes over share sales.
Understanding priority on secondary registrations through an example
A startup raises capital through venture funding. Later, as the company grows, some early investors want to sell their shares in a secondary sale. However, the company’s shareholder agreement states that priority is given to Series A investors before Series B investors can sell. This means that Series A investors can exit first, ensuring they benefit from their early investment.
In another example, a private company with multiple shareholders organizes a secondary sale of its shares. The company grants priority to employees and founders before allowing external investors to participate. This ensures that insiders have the first opportunity to sell their shares.
An example of a priority on secondary registrations clause
Here’s how a priority on secondary registrations clause might appear in a shareholder agreement:
“In any secondary sale of shares, the Company shall grant priority to existing Preferred Shareholders before allowing other classes of shareholders to participate. The allocation of sale rights shall be determined in accordance with the terms set forth in this Agreement.”
Conclusion
Priority on secondary registrations helps structure the order in which securities can be sold in secondary markets. It protects early investors, ensures fair share distribution, and helps companies manage liquidity events effectively.
For SMBs and startups, defining priority rules for secondary registrations in investment agreements can help maintain investor trust and prevent conflicts over share sales.
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.