Registration rights: Overview, definition and example
What are registration rights?
Registration rights refer to a contractual agreement that gives investors the ability to require a company to register their shares with regulatory authorities, such as the SEC (Securities and Exchange Commission), so the shares can be publicly sold. These rights are often negotiated in investment agreements to provide liquidity for investors and facilitate the public resale of their shares.
For example, an investor might have registration rights allowing them to include their shares in the company’s public offering.
Why are registration rights important?
Registration rights are important because they provide investors with a clear path to liquidate their shares and participate in the company’s public offerings. These rights ensure that investors can convert their equity into cash, especially in cases where the shares would otherwise be restricted or illiquid.
For companies, granting registration rights can be a crucial incentive for attracting investors. However, it also imposes obligations, such as covering the costs of registration and managing the process of regulatory compliance.
Understanding registration rights through an example
An investor holds equity in a private tech startup. The company plans an initial public offering (IPO), and the investor exercises their registration rights to include their shares in the IPO. This allows the investor to sell their shares as part of the public offering, gaining liquidity while the company benefits from additional market interest in the offering.
An example of a registration rights clause
Here’s how a registration rights clause might appear in a contract:
“The Company agrees to grant the Investor registration rights, enabling the Investor to include their shares in any public offering of the Company’s securities, subject to the terms and conditions outlined herein. The Company shall bear all costs associated with the registration, except for the Investor’s legal fees or underwriting discounts.”
Conclusion
Registration rights are a valuable tool for investors, ensuring they have the ability to sell their shares publicly and achieve liquidity. For companies, offering registration rights can attract investment while creating obligations to manage the registration process. Clearly defined registration rights in agreements balance these interests, fostering trust and aligning the goals of both parties.
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.