Piggyback Registration
What Is a Piggyback Registration?
Piggyback registration alludes to a method of selling shares through a initial public offering (IPO). It is commonly utilized by early investors, founders, and other company insiders who negotiated the right to sell their shares as part of any future IPO.
Not at all like demand registration, where shareholders are qualified for demand that a company embrace an IPO, investors depending on piggyback registration to sell their shares don't reserve the privilege to force an IPO. All things considered, they must trust that the IPO will be demanded by different investors, actually "piggybacking" on other investors' demand registration rights.
How Piggyback Registrations Work
At the point when a company is moving toward an IPO, a few investors might wish to position themselves to sell their shares when the company goes public. Keeping that in mind, those investors can lobby the company's IPO underwriter to incorporate their shares along with the more extensive pool of shares being sold in the IPO. In the event that their request is accepted by the underwriter, those investors' shares would be alluded to as a "piggyback registration" and would be unveiled as part of the IPO's prospectus records.
According to the company's point of view, piggyback registrations are a helpful method for permitting an assortment of early funders and different insiders to exit their investments and account for new investors who may be more intrigued by the long-term possibilities of the company. All things considered, companies will frequently go through several phases of raising money in their initial years, with every investor bringing their own investment style, objectives, and time horizon. A significant number of those investors are probably going to see an impending IPO as a helpful opportunity to cash in on their investment.
Beside the way that they don't permit their holder to determine the timing of their exit, the second major drawback of utilizing a piggyback registration is that they are generally given lower priority than demand registrations by underwriters. In practice, this means that assuming the underwriter accepts that there is deficient market demand to sell every one of the shares that investors wish to sell through the IPO, some or the piggybacking investors might be all unable to participate.
Illustration of a Piggyback Registration
Michaela is the director of XYZ Capital Partners, a venture capital (VC) firm spend significant time in companies expected to IPO in five years or less. As part of her investment strategy, Michaela is careful to just invest in companies that have proactively received funding from other capital suppliers that have a shown history of directing the companies they invest in through to effective IPOs.
While these different investors generally demand registration rights while arranging their investments, XYZ explicitly decides on piggyback registration rights. Since piggyback registration rights are technically inferior to demand registration rights according to a legal viewpoint, XYZ is frequently able to haggle somewhat better terms in different areas of the negotiation. In addition, by just partnering in ventures that are almost certain to IPO, XYZ is generally able to really exit its position by piggybacking on the demand rights of different investors.
Features
- Investors depending on piggyback registration can't force an IPO to occur; they are dependent on the demand registration rights of different investors.
- The primary drawbacks of piggyback registration are its lack of control over the timing of an IPO and the way that it is in many cases treated as a lower priority by underwriters.
- Piggyback registration is a method of selling shares through an IPO.
