Registration Rights Agreement

The Registration Rights Agreement must delineate which investors are entitled to register their shares with the SEC and which investors are not. It is possible that the agreement would allow all investors to do so, but certainly not required. Typically, if there are disparities in terms of which investors have a right to register their shares and which do not, it will be based upon the price that was paid for the shares. In other words, the right to register with the SEC will typically command a higher price per share.

While the Registration Rights Agreement does typically grant investors a right to register their shares with the SEC, that right is not unfettered. Rather, there are material limits on the right to register based upon the general welfare of the corporation. For example, in situations where registration would lead to a disclosure that would adversely impact the corporation, a corporation would not want an investor registering shares. As a result, there will usually be areas of the agreement that limit investors’ ability to register with the SEC. Other limitations on this right include a fairly typical time horizon following the initial public offering (IPO) of the corporation. For example, the Registration Rights Agreement might provide that investors cannot register any shares for six months following the IPO. Furthermore, the agreement might also provide for a certain minimum share registration requirement, such that the corporation can avoid the hassle of registering very small amounts of shares.

Corporations will also need to endeavor to provide accurate information to investors, which will materialize in the form of a term in the Registration Rights Agreement. Investors will typically want a measure of protection from material misstatements or omissions of the corporation depending upon their level of sophistication, and this would come in the form of an indemnification clause contained within the Registration Rights Agreement. While such indemnification may not be desirable from the standpoint of the startup, it may very well be necessary to get sophisticated investors on board.