What are demand and piggyback registration rights in a venture capital investment?

Andy Lau has substantial experience representing pe/vc funds, investment banks and startup and growth companies in pe/vc investments, M&A, IPO and capital markets transactions. For a preliminary consultation, please email him at andy@askventure.com.

This article discusses the two types of registration rights that you will find in a typical venture capital financing – demand registration rights and piggyback registration rights.

Why do you need to register your shares?

Skipping all the legal nonsense and jargon, if you want to sell shares of a company on a stock exchange in the US to the general public (e.g., an IPO), you first need to have the shares registered with the SEC (Securities and Exchange Commission) in the US. See Securities Act of 1933.

What is demand registration right?

Demand registration rights entitle investors to demand a company to register its shares so that investors can sell them in a public offering, i.e., causing the company to undergo an IPO.

What is piggyback registration right?

Piggyback registration rights entitle investors to register their shares when a company conducts a public offering. Piggyback registration rights, however, do not entitle investors to initiate an IPO, but merely entitle them to include their shares in the event of an IPO. Therefore, piggyback registration rights are inferior to demand registration rights.

Term sheets and registration rights agreement

Registration rights (demand and piggyback) are negotiated in term sheets and registration rights agreement. Typically, VCs would enjoy demand registration rights, whereas founders would enjoy only piggyback registration rights.

IPO oustide US (e.g., Hong Kong)

If you are conducting an IPO outside the US, e.g., in Hong Kong, then registration rights are irrelevant, because there are not such registration requirements in Hong Kong. Even for the international placing tranche of a Hong Kong IPO, the company will be selling its shares under Rule 144A of Securities Act of 1933, where registration is not required.

Related posts:

1. What is Series A Convertible Preferred Stock Funding and Financing in a Venture Capital Investment?
2. Venture capital exits – trade sale vs IPO – compared and analyzed
3. Exercise price of share option under a share option scheme of a Hong Kong listed company
4. Pre-money, Post-money Valuation and Calculation in a Venture Capital Investment
5. How to Calculate Liquidation Preference of Preferred Stock in a Venture Capital Financing?

Related resources:

Comments

Leave a comment