Registration rights give Investors who own Preferred Stock the right to require the Company to register its Common Stock with the Securities and Exchange Commission (“SEC”). Because Preferred Stock can only be freely sold on the public stock market once the Common Stock is registered, this is an especially important term for Investors.
Registration with the SEC is an expensive and time-consuming process for the Company. Initial registration takes a lot of time and effort, and the Company must continue to comply with periodic SEC reporting requirements.
Initial registration rights terms rarely dictate the registration process. That is a complicated process, and the Company’s investment banker and underwriter will decide those terms when and if the time comes. What should be negotiated is:
- Whether the registration rights are demand or piggyback (defined separately); and
- If a demand registration right is decided on, (1) how many times an Investor can demand registration, and (2) the size of registration Investors would be permitted to demand.
A few other terms are typical in registration rights provisions, defined separately:
- The rights of Investors to require the Company to use Form S-3 to register shares;
- Who pays for the registration expenses;
- Lock-up terms; and
- Termination of registration rights.