In February 2023, the British Private Equity and Venture Capital Association (the "BVCA") published updated model documents for early-stage capital investments. The aim of the update was to promote industry standard legal documents in the UK and align these documents more closely with their US counterparts published by the National Venture Capital Association (“NVCA”). We analysed the key changes to the updated documents in our previous article.
We continue to see the influence of the US capital markets here in the UK. Recently, the BVCA published a model Registration Rights Agreement ("RRA") (based on the NVCA’s Investor Rights Agreement) and this briefing note will focus on its key terms.
What is an RRA?
A US concept, an RRA is an agreement between a company and its investors which sets out the investors’ rights for their unregistered shares in the company to be registered with the Securities and Exchange Commission (the "SEC").
Registration rights provide liquidity to investors by specifying a procedure to register the re-offer and resale of shares acquired in an unregistered offering under the Securities Act of 1933 (the "Securities Act").
These agreements are important to investors because they provide buyers with post-closing liquidity of the securities sold in the offering. Recognising the importance of RRAs, the BVCA published its own template.
Demand Registration Rights
In the RRA, investors are granted demand registration rights. These rights allow investors to require the issuer to register the offer and re-sale of all, or a portion, of its shares under the Securities Act.
To trigger demand registration, investors will need to own an agreed percentage of the registrable shares in the company. The BVCA suggests that this is 30%, and notes that the company and experienced investors will want to ensure that this threshold is set at a level that prevents small, or inexperienced investors, from being able to trigger the demand registration rights.
The initiating investors can request that the company file a registration statement with the SEC in respect of at least 40% of the registrable securities then outstanding (or such other percentage threshold). The company would then have to provide the other shareholders with notice of the proposed registration and file the registration statement under the Securities Act.
Company (or "Piggyback") Registration Rights
The BVCA’s RRA also grants piggyback registration rights to investors. The RRA allows holders to include shares in a registration being carried out by the company, irrespective of whether the company is effecting the registration for its own benefit or for the benefit of other investors. This registration right is particularly useful for investors who cannot trigger demand registration by virtue of their shareholding falling below the requisite threshold.
Where the company proposes to register any of its securities under the Securities Act in connection with a public offering of shares for cash, the company must provide notice of the proposed registration to each investor.
Investors can then request that their shares are included in the registration being effected by the company (in other words, piggybacking their shares to the registration being effected by the company).
Differences between UK and US model form RRAs
While the BVCA’s RRA is based on the NVCA’s equivalent RRA (the Investor Rights Agreement), there are key differences between the two agreements. This includes that the NVCA’s RRA contains more robust provisions concerning the termination of registration rights. The NVCA’s RRA also contains provisions to provide major investors with information rights in respect of financial statements, balance sheets, cashflows, as well as an optional drafting provision and certain observer rights in respect of board meetings.
Despite the BVCA’s RRA being derived from the NVCA’s RRA, the NVCA’s RRA contains more full-bodied provisions.
Conclusion
The BVCA’s publication of a model RRA should be welcome news to those involved in US investment into UK companies. With the publication of the RRA, the BVCA has issued a comprehensive suite of industry-standard documentation for Series A funding rounds. The BVCA’s RRA further reflects the continuing alignment of UK practice with that of the US, making the UK an even more attractive place for US companies and individuals to invest. We look forward to seeing how UK market practice develops in respect of RRAs.
This article was co-authored by Trainee Solicitor Alejandro Coghill.