Registration Right

What Is Registration Right?

A registration right is a right entitling an investor who owns restricted stock to expect that a company list the shares publicly so that the investor can sell them. Registration rights, whenever exercised, can force a privately-held company to turn into a publicly-exchanged company.

Understanding Registration Rights

Registration rights are usually assigned when a private company issues shares to raise money. In practice, registration rights held by a group of minority investors seldom become possibly the most important factor. The majority block of shareholders regularly decides if or when the company goes public.

Registration rights can help investors holding private shares gain access to the more extensive market to sell their shares. Early investors might have shorter time horizons than company founders for a liquidity event and thus might wish to exercise these registration rights.

Nonetheless, exercised rights might possibly fundamentally affect a company. A private company would need to go through the initial public offering (IPO) filing process, which is frequently expensive, perhaps premature for the principals of the firm and its shareholders, or too dilutive. Employees would need to devote time to arranging material required for the SEC Form S-1 filing instead of focusing on everyday business operations. The IPO could also end up arriving at the market at an unfavorable time (suboptimal market conditions), which could lead to the share price being lower than desired.

Rights are ordinarily negotiated when privately-held shares are purchased. Commonplace negotiation points incorporate the number of rights assigned to the investor, with management probably favoring less rights due to IPO expenses. The company might prevent registration rights from being authorized for a long time, especially in the event that the company is in the beginning phases of raising funds. This prevents the company from being pushed to open up to the world before it has worked long to the point of being stable.

It is in the company's interest to limit the effect of registration rights.

Piggyback and Demand Rights

Registration rights appear as all things considered "piggyback" or "demand." Piggyback rights permit investors to have their shares remembered for a registration that is at present in the planning stages by the company. Piggyback rights generally don't cause issues for a firm.

Demand rights are the type of registration rights described in the first sections, and these can be contentious for the reasons discussed. Unless there are clear and convincing reasons to start an IPO process, founders and principal stakeholders will rebuke the exercise of demand rights.

Clauses in Registration Rights

Registration rights regularly contain clauses that establish the terms of registration. Among these details is the "lock-up" period during which investors are precluded from selling their shares in a company after it has opened up to the world. Ordinarily, this is limited to 180 days.

Expiration of the lock-up period frequently results in the selloff of a company's stock and a fall in its price. For instance, the shares of social media company Snap Inc., fell by as much as 5% after expiration of its lock-up period. Different clauses included are the termination of registration rights for investors and establishing responsibility for registration payment to the company's management.

Highlights

• One type of registration rights — known as demand rights — allows investors to force a company to open up to the world.
• Registration rights, whenever exercised, can force a privately-held company to turn into a publicly-exchanged company.
• Piggyback rights, another type, permit investors to have their shares remembered for a liquidity event.