What is a Registration Right
A registration right is a right which entitles an investor who owns restricted stock the ability to require a company to list the shares publicly so that the investor can sell them. Registration rights, if exercised, can force a privately-held company to become a publicly-traded company. These rights are usually assigned when a private company issues shares in order to raise money. In practice, registration rights held by a group of minority investors seldom come into play. The majority block of shareholders typically decides if or when the company goes public.
BREAKING DOWN Registration Right
Registration rights can help investors holding private shares gain access to the broader market to sell their shares. Early investors may have shorter time horizons than company founders for a liquidity event and thus may wish to exercise these registration rights. However, exercised rights can potentially have significant impacts on the company. The private company would have to go through the initial public offering (IPO) filing process, which is likely to be expensive, perhaps premature for the principals of the firm and its shareholders, or too dilutive. Employees will have to dedicate time to organizing material required for the SEC Form S-1 filing instead of focusing on day-to-day business operations. The IPO might also wind up reaching the market at an inopportune time (suboptimal market conditions), which could lead to the share price being lower than desired.
Rights are typically negotiated when privately-held shares are purchased. Typical negotiation points include the number of rights allotted to the investor, with management likely preferring fewer rights due to IPO expenses. The company may prevent registration rights from being enacted for several years, especially if the company is in the early stages of raising funds. This prevents the company from being pushed to go public before it has operated long enough to be stable. It is in the company’s interest to limit the effect of the registration right.
Two Types of Registration Rights
Registration rights take the form of either "piggyback" or "demand." Piggyback rights allow investors to have their shares included in a registration that is currently in the planning stages by the company. Piggyback rights generally do not cause issues for a firm. Demand rights are the type of registration rights described in the preceding sections, and these can be contentious for the reasons discussed. Unless there are clear and compelling reasons to initiate an IPO process, founders and principal stakeholders will rebuff the exercise of demand rights.