Registration rights agreement: Overview, definition, and example
What is a registration rights agreement?
A registration rights agreement is a legal document between a company and its investors that outlines the rights of the investors to have their securities (usually stocks or bonds) registered with the relevant securities regulators, such as the Securities and Exchange Commission (SEC). This agreement grants investors the right to demand that the company registers their securities, enabling them to sell those securities publicly.
Registration rights agreements are typically used in private placements, where investors acquire securities in a company that is not yet publicly traded. The agreement ensures that, after a certain period or upon a specific event (such as an initial public offering or IPO), the investors can register their securities for sale on the public market.
Why is a registration rights agreement important?
A registration rights agreement is important because it provides a pathway for investors to convert their private equity or debt into publicly tradable securities. Without such an agreement, investors in private companies may be stuck holding illiquid securities that cannot be sold on public markets.
For businesses, offering registration rights to investors can make it easier to attract funding, as investors are more likely to invest if they have a clear path to liquidity through registration. The agreement helps ensure that investors’ interests are protected, and it defines the process for when and how the securities can be registered and sold.
Understanding registration rights agreement through an example
Imagine a venture capital firm invests in a startup company in exchange for equity. The investment is made through a private offering, meaning the shares cannot be sold on public markets until the company goes public or the shares are registered. As part of the investment agreement, the company and the venture capital firm enter into a registration rights agreement, which gives the firm the right to require the company to file for registration of the shares with the SEC after a certain period or upon the occurrence of an IPO.
If the startup later decides to go public through an IPO, the registration rights agreement ensures that the venture capital firm can sell its shares to the public. This gives the investor liquidity and allows the company to raise more capital by expanding its shareholder base.
An example of a registration rights agreement clause
Here’s how a registration rights agreement clause might look in an investment contract:
“The Company agrees to file a registration statement with the Securities and Exchange Commission within [Insert Number] days following a demand by holders of at least [Insert Percentage]% of the outstanding shares of the Company’s stock. The registration statement shall cover the sale of shares held by such holders, and the Company shall bear all reasonable costs associated with the registration. The demand for registration may only be made after [Insert Period] from the date of this Agreement.”
Conclusion
A registration rights agreement is a key component of private equity or debt investments, providing investors with a mechanism to convert their holdings into publicly tradable securities. This agreement outlines the specific rights, procedures, and conditions under which investors can demand the registration of their securities, ensuring that both parties are aligned on how liquidity will be achieved. For companies, these agreements help attract investment by offering a clear path to future capital raises and liquidity events. Understanding and properly drafting registration rights agreements is essential for protecting investor interests and facilitating smooth transitions from private to public market participation.
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.