What is a Pay to Play Provision?

Pay to play simply means requiring money to be a part of some activity. In the corporate world, individuals wishing to be part of a transaction must often put in money. This is common in investing, where an individual must put in funds to be part of a future equity round.

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How are Pay to Play Provisions Used? 

In corporate or startup finance, Pay to Play is commonly added as a provision of preferred stock. It demands stockholders to take part in stock offerings to get benefit from specific anti-dilution protections. If they do not buy prorated stock in these offerings, they lose the provisional benefits. 

In extreme situations, investors not taking part in it have to convert to ordinary stock, so they lose the protections of the preferred stock. This idea reduces the big investors fear that small investors will let them continue providing the required equity and get benefits, especially in problematic economic situations for the corporation. This is known as harsh provision added only when one participant is having a strong bargaining power. 

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Negative Connotation 

Pay to Play often refers to gifts and monetary exchanges to influence decision makers. For example, the exchange of gifts or money and provision of sponsorship in a way that construction, engineering or design company is selected for work that otherwise might not be available. 

This type of conduct is illegal in many industries, such as in the financial markets. In the United States, the SEC (Securities & Exchange Commission) of the United States, the MSRB (Municipal Securities Rulemaking Board) and the FINRA (Financial Industry Regulatory Authority) regulate and restrict the gift awarding practices of investors. More details is available in the IAA Rule 206(4 to 5) (Investment Advisers Act 1940 and G-37, G-38 rules in the Rule Book of MSRB.