Piggyback Registration Rights: What They are, How They Work

What Are Piggyback Registration Rights?

Piggyback registration rights are a form of registration rights that grants the investor the right to register their unregistered stock when either the company or another investor initiates a registration. This type of registration right is seen as inferior to demand registration rights because this class of right-holders cannot initiate the registration process.

Understanding Piggyback Registration Rights

Since piggyback registration rights are considered inferior to demand registration rights, they are sometimes excluded from registrations in favor of investors with demand registration rights. This could happen if the underwriter of the registration determines that the market will not be able to handle all of the shares that are part of the registration.

However, investors with piggyback registration rights are allowed to participate usually in an unlimited number of registrations, compared with investors, who have demanded registration rights.

Piggyback registration rights might include:

• The right to cut back investor shares in an offering: Piggyback registration rights provisions typically allow underwriters to completely eliminate investors as selling shareholders in an IPO. In subsequent offerings, the investors will typically negotiate that they cannot be cut back to less than 25% or 30% of the offering.
• The priority of investor shares to be included in an offering: Some venture funds aggressively negotiate the priority of any shares that the underwriters allow to be registered in a company-initiated registration. A later investor may also request that their shares be included in a registration before any non-company shares.
• Piggyback registration rights for founders and management: Founders typically want piggyback registration rights for the same reason that venture funds want them. Absent registration, founders that are affiliates will need to comply with volume restrictions under Rule 144. A registered public offering may be one of the few orderly ways that a founder can sell a large number of shares.

Demand Registration vs. Piggyback Registration

Unlike demand registration, where shareholders are entitled to demand that a company undertake an IPO, investors relying on piggyback registration to sell their shares do not have the right to force an IPO. Instead, they must wait for the IPO to be demanded by other investors, effectively “piggybacking” on other investors’ demand registration rights.

Piggyback registration rights holders also may hold a great deal of influence over company management when it comes to the timing of the registration. Piggyback registration rights are also 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.