29 May 2020

What Is a Piggyback Registration?

Piggyback registration refers to a method of selling shares through an initial public offering (IPO). It is typically used by early investors, founders, and other company insiders who negotiated the right to sell their shares as part of any future IPO.

Unlike demand registration, where shareholders are entitled to demand that a company undertakes an IPO, investors relying on piggyback registration to sell their shares do not have the right to force an IPO. Instead, they must wait for the IPO to be demanded by other investors, effectively “piggybacking” on other investors’ demand registration rights.

Key Takeaways

  • Piggyback registration is a method of selling shares through an IPO.
  • Investors relying on piggyback registration cannot force an IPO to happen; they are reliant on the demand registration rights of other investors.
  • The main drawbacks of piggyback registration are its lack of control over the timing of an IPO and the fact that it is often treated as a lower priority by underwriters.

How Piggyback Registrations Work

When a company is moving toward an IPO, some investors may wish to position themselves to sell their shares as soon as the company goes public. To that end, those investors can lobby the company’s IPO underwriter to include their shares along with the broader pool of shares being sold in the IPO. If their request is accepted by the underwriter, then those investors’ shares would be referred to as a “piggyback registration” and would be disclosed as part of the IPO’s prospectus documents.

From the company’s perspective, piggyback registrations are a convenient way to allow a variety of early funders and other insiders to exit their investments and make room for new investors who might be more interested in the long-term prospects of the company. After all, companies will often go through several stages of fundraising in their early years, with each investor bringing their own investment style, objectives, and time horizon. Many of those investors are likely to view an upcoming IPO as a convenient time to cash in on their investment.

Aside from the fact that they do not allow their holder to determine the timing of their exit, the second major drawback of using a piggyback registration is that they are generally given lower priority than demand registrations by underwriters. In practice, this means that if the underwriter believes that there is insufficient market demand to sell all of the shares that investors wish to sell through the IPO, some or all of the piggybacking investors may be unable to participate.

Example of a Piggyback Registration

Michaela is the director of XYZ Capital Partners, a venture capital (VC) firm specializing in companies expected to IPO within five years. As part of her investment strategy, Michaela is careful to only invest in companies that have already received funding from other capital providers that have a demonstrated track record of guiding the companies they invest in through to successful IPOs.

Whereas these other investors generally insist on demand registration rights when negotiating their investments, XYZ specifically opts for piggyback registration rights. Since piggyback registration rights are technically inferior to demand registration rights from a legal perspective, XYZ is often able to negotiate slightly better terms in other areas of the negotiation. Moreover, by only partnering in ventures that are highly likely to IPO, XYZ is generally able to effectively exit their position by piggybacking on the demand rights of the other investors.

Covid-19 – Johns Hopkins University

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