Piggyback registration is the process of selling shares in the Initial public offer (IPO). It is usually utilized by early investors founders, founders and other corporate employees who negotiate the option for them to purchase their own shares in the future IPO.
Contrary to the demand registration in which shareholders are legally entitled to demand that a company launch an IPO however, investors who rely on piggyback registrations for the sale of their stock don’t have the power to force an IPO. Instead, they have to sit and wait until the IPO to be requested by other investors which is effectively “piggybacking” on the other investors’ rights to demand registration.
How Piggyback Registrations Work
If a company is making progress towards the idea of an IPO Investors may want to prepare themselves for selling their stakes once that company is public. In this regard, investors may petition the company’s IPO underwriter to include their shares in the wider number of shares to be sold during the IPO. If they are granted their request by the underwriter the shares of those investors would be termed”piggyback registration “piggyback registered” and be listed in an IPO’s prospectus.
From a business’s perspective from a business’s perspective, piggyback registrations can be an effective way for an array of early funders as well as other insiders to withdraw their investments , and open the door for new investors who could be more concerned with the long-term potential of the business. In the end, businesses will typically go through multiple phases of raising capital in the beginning and each investor brings their own style of investing goals, goals, and time-frame. A lot of investors may consider an IPO as a good opportunity to earn a return on their investments.
Apart from the fact that they don’t allow their owner to decide on the time of their exit, the other major disadvantage of using piggyback registrations is that they’re typically less priority than demand registrations made by underwriters. In reality this means that when the underwriter is of the opinion that there is not enough demand for all of the shares investors want to sell during the IPO and/or all investors who piggyback might not be able to take part.
Example of a Piggyback Registration
Michaela is director for XYZ Capital Partners, a venture capital (VC) company with a focus on companies that are which are scheduled to launch their IPOs within 5 years. In her investment strategy Michaela is cautious to choose companies which have received capital from other capital sources that have proven track records of leading the businesses they invest in the process of achieving successful IPOs.
In contrast to other investors who generally insist on the right to demand registration when they negotiate their investments, XYZ specifically opts for piggyback registration rights. Since piggyback rights are less technically sound than demand registration rights from a legal standpoint, XYZ is often able to negotiate more favorable terms in other aspects of the negotiations. Furthermore, by only participating in ventures which are likely to go public, XYZ is generally able to exit its position through piggybacking the rights to demand of other investors.
