Registration Rights

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Updated September 15, 2023
Raising Venture Capital

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Definition A registration rights provision in a term sheet allows an investor to require a company to register the investor’s shares with the SEC when certain conditions are met, ensuring that the investor has the opportunity to sell their shares in the public market. Commonly listed conditions are: a certain period of time passing after the initial investment or an IPO; the company qualifying for a simplified registration; and/or the company registering other shares for public sale.* Registration rights are desirable to investors because the SEC’s Rule 144 limits the sale of a company’s stock to 1% of the total outstanding shares in a three-month period but only applies to unregistered stock.*

Registering shares is usually seen as a good thing for both a company’s management and investors. When a company goes public, large investors like Fidelity and T. Rowe Price may buy up large positions and hold them. This means the company’s stock is not widely available for purchase on the open market and can lead to volatility. When a large investor is able to sell a meaningful position after the lockup period, this increases the number of shares available for trading, which can reduce volatility. Again, good for everybody.

Usually, if big investors want liquidity near an IPO, there will be a separate conversation between management and investors as to how to make this happen outside of registration rights.

danger In extremely rare cases, registration rights can be used to force a company to go public. This is sometimes referred to as demanded registration rights. It’s so rare, in fact, that we could only find one modern example of this happening, between IVP and Applied Medical Corporation in 2012.** In this case, IVP was granted registration rights that they used to force Applied Medical to go public so they could get liquidity. A forced IPO cuts off opportunity for other forms of exit such as a sale and can greatly damage the company if the timing is wrong.

Restrictions on Sales

Term sheets may specify various restrictions on sales (ROS or transfer restrictions). Types of restrictions include: preventing stockholders from selling within a certain time period or until a certain valuation has been reached; subjecting sales of stock to consent by the board of directors and/or other stockholders; giving some stockholders right of first refusal on the sale of others’ stock; incorporating a co-sale agreement; and simply prohibiting the sale of stock altogether. These restrictions may appear in a clause titled Restrictions on Sales or under other headings.

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