Brad Feld

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The Joy of Registration Rights

May 03, 2006
Category Term Sheet

As Jason and I close out our Letter of Intent series, we thought we’d cover one last item that has screwed many a seller – the case where a public company acquires a private company for unregistered stock.  Some buyers will try to ignore this – a good seller should work hard up front to get agreement on what type of stock and what kind of registration rights they will be receiving. Expectation setting is key in this situation.

One thing to consider here is the non-binding nature of a “promise” to register shares. The buyer will argue that they can’t guarantee to register the shares because they don’t control the SEC. The past history of the buyer with the SEC is crucial, including knowing the current status of SEC filings, any outstanding registration statements, and any promises that the buyer has made to shareholders of other companies it has acquired.

We’ve had several unfortunate situations where we’ve been “promised” a quick registration from a buyer, only to have them drag their feet on the filing after the deal, or get the filing hung up in the SEC. In today’s SOX environment, we’ve been amazed by the poor behavior of several of the big four accounting firms who “don’t have time” to work on merger accounting questioned by the SEC, especially in situations where the accounting firm is not going to be the merged company’s auditor going forward. Be very careful here as stock isn’t tradeable until it’s registered and the 12 month automatic waiting period for unregistered stock to become registered (in the absence of a registration statement filed with the SEC) can be a long time (and a lot of volatility) to have to wait for.

While I much prefer sex (as in “The Joy of …”), sometimes I have to settle for registration rights.  With this post, Jason and I end our Letter of Intent series.  We hope you’ve enjoyed it – feel free to comment and email me additional questions to address.