What are Piggyback Registration Rights?

As an investor, one of the key things you want is the ability to convert your ownership stake into cash when needed. However, if your shares are registered with the SEC, selling them can be easy and easy. Piggyback registration rights provide a potential solution when you lack other registration options. But how exactly do they work, and how beneficial are they really?

Read on to understand what piggyback rights are, how the piggyback registration process works, how they compare to demand registration, and the pros and cons of different types of piggyback rights. With this knowledge, you’ll be better equipped to negotiate the registration terms best suited to your investment situation.

What are piggyback registration rights?

In simple terms, piggyback registration rights allow investors to register their shares when another party initiates a registration. For example, say Company A is planning an IPO. As an investor in Company A, piggyback rights would allow you to potentially register some or all of your shares to sell them as part of Company A’s IPO.

With registration rights, your shares may be allowed for a certain period or number of years before you can freely trade them. Piggyback rights provide a way around this by letting your shares “piggyback” off of another registration process already underway.

The key distinction that sets piggyback rights apart from demand registration rights is that the holder of piggyback rights cannot independently require the company to file a registration statement. You have to wait for someone with demand rights or the company to kickstart the registration machinery.

How does the piggyback registration process work? 

When putting piggyback rights into action, the step-by-step process typically goes as follows:

1. Another party (the company itself or an investor with demand rights) decides to register shares and files the required registration paperwork with the SEC.

2. Under the terms of your investment agreement, the company then has to notify you of this registration and offer you the chance to piggyback by registering some or all of your shares. 

3. If interested, you can register however many shares you want to sell. Register your entire position or just a portion.

4. The company incorporates information on your shares into the registration statement and handles the SEC filing process. 

5. Once the SEC declares the registration statement effective, allowing shares to be freely sold, you can then attempt to find buyers for your registered shares, much like the other parties participating in the registration.

A few key limitations on piggyback rights often include:

• The lead underwriter on the deal may reduce the total number of shares allowed from piggyback participants if they decide it could undermine the offering.
• Participating piggyback investors may be cut entirely from the deal.
• Demand registrants often get priority over piggyback participants when share amounts must be reduced.

So, piggyback registration rights allow you to join in another registration, but there is no guarantee your shares will make it to the finish line.

Comparing demand registrations and piggyback registrations

When it comes to registering securities (like stocks) for public trading, investors can have different types of rights. Two of these rights are “piggyback” and “demand” registration. It is helpful to compare it with demand registration to understand piggyback registration. Here are some key points to keep in mind:

1. Control over timing

Demand registrants can require the company to initiate registration procedures whenever conditions outlined in their investment terms are met. This gives them significant control to push for liquidity on their desired timeline. Piggyback participants have no control over registration timing and must wait for the company or another investor to act.

2. Costs

Piggyback rights come with minimal incremental costs since shares are added to registrations already underway. Demand registrations done independently can involve substantial legal, accounting, underwriting, and other costs borne by the company. So companies may limit or avoid granting demand rights, while piggyback rights are easier to obtain.

3. Risk of exclusion 

As noted earlier, piggyback shares face a heightened risk of partial or complete exclusion from offerings if underwriters feel the market can’t support all planned shares. Demand registrants rarely face this same threat of exclusion.

These contrasts demonstrate why demand rights are generally viewed as more powerful and beneficial for investors, while piggyback rights provide more limited and conditional registration opportunities.

Types of piggyback registration rights

Understanding the types of piggyback rights and their relative merits for investors granted piggyback privileges can lead to better choices during investment negotiations. Common variants include:

1. Unlimited rights

This gives you the option to register 100% of your share position anytime another registration occurs. It provides maximum flexibility to liquidate your entire holdings in a single move post-IPO if desired. Unlimited rights also increase the risk of facing underwriter share cuts if supply overwhelms demand.

2. Limited rights

Here, you may only be able to register a set percentage or share count each time piggybacking opportunities arise. Your contract may specify registering up to 10% of your holdings per future registration. This reduces supply pressure but can lengthen the timeline for liquidating your entire position.

3. Shareholder and management rights

Some piggyback rights cover just investor registrations, while others expand rights to management and insider registrations. Broad rights covering management filings can increase total supply pressure and provide more frequent registration opportunities.

Evaluating these variants and crafting variations to suit your specific needs and priorities is important to mapping an exit strategy as an investor without independent registration powers.

Conclusion

It is not easy for investors to sell their shares if they don’t have demand registration rights. But there’s a way to sell them without registration called piggyback rights. These rights provide a way to sell shares when certain conditions are met. Investors need to understand how to use piggyback rights to sell their shares and the limitations. This knowledge can be very helpful for investors who want to sell their shares eventually.

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