WHAT IS Piggyback Registration
A piggyback registration occurs when an underwriter permits existing company shares to be sold in conjunction with a new public offering. The registration of these securities is said to be piggybacking off of the initial public offering.
BREAKING DOWN Piggyback Registration
In a piggyback registration, the underwriter is required to sign off on the idea to set the process in motion. In addition, the arrangement must be noted in the new issue's prospectus. Under these kinds of arrangements, the prospectus will provide all the details needed, including the names of those selling private shares in the transaction. Piggyback registrations are often done as a means of consolidating all the outstanding shares and allowing joint ventures to participate in the initial public offering.
Registration rights to be negotiated typically include underwriters being able to reduce investor shares in an offering. Rights provisions often allow underwriters to completely eliminate investors as selling shareholders in an initial public offering. In subsequent offerings, investors are allowed to stipulate that they cannot be cut back to less than 25% or 30% of the offering.
Another provision is the priority level of investor shares included in an offering. For example, a venture fund may negotiate the priority of any shares that the underwriters allow to be registered in a company-initiated registration. For similar reasons, it is possible that founders and management that have piggyback registration rights may be subject to negotiation as well.
Piggyback Registration Rights vs Demand Registration Rights
Piggyback registration rights are considered inferior to demand registration rights for two main reasons. First, investors cannot initiate the registration process. Investors who only have piggyback registration rights are unable to control the timing of registrations. Second, shares sold under piggyback rights are considered inferior. Thus, piggyback registration rights often are excluded from offerings, while shares under demand registration rights are favored.
Demand registration rights give investors the right to require the invested company to register its shares owned by these investors for sale to the public, even if the company is not contemplating issuing any securities to the public at the given time. Piggyback registration rights have one solid benefit; holders often are allowed to participate in an infinite number of registrations without being subjected to the caps that apply to other registration rights. In addition, piggyback registration rights are exercised much more frequently than demand registration rights because adding shares associated with piggyback registration rights is relatively cheaper in terms of marginal cost on an ongoing registration process.