Rights Offering (Issue)

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What is a 'Rights Offering (Issue)'

A rights offering (issue) is an issue of rights to a company's existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holdings, within a fixed time period. In a rights offering, the subscription price at which each share may be purchased is generally at a discount to the current market price. Rights are often transferable, allowing the holder to sell them on the open market.

BREAKING DOWN 'Rights Offering (Issue)'

In a rights offering a company offers to sell shares to existing stockholders. Each shareholder receives one right for each share it owns. This is a right, and not an obligation and a shareholder can choose to exercise this right by purchasing shares by the date listed on the stock purchase right, they can do nothing, or they can sell their rights to another person.

Benefits

Companies generally offer rights when they need to raise money. They may need to raise money for a variety of reasons, for example to pay off debt, purchase equipment or acquire another company. The benefit to a company of raising money through a rights offering is that the company can bypass underwriting fees. In some cases, a company may use a rights offering to raise money if there are no other viable financing alternatives. This is common during economic slowdowns when banks become reluctant to lend to companies. The benefit of a rights offering to shareholders is that shares are generally offered at a discount. Sometimes this discount can be quite steep, it all depends on how much a company feels it needs to encourage its shareholders to participate in the rights offering.

Negatives

A rights offering by a big, established company may be taken by the market as evidence that a company is struggling. This is because rights offerings flood the market with more shares, diluting the value of the available shares. Shareholders can become disgruntled when their shares are diluted. But, a rights offering is meant to calm this concern because only existing shareholders are given the opportunity to buy additional shares. This is unless of course, shareholders decide to sell these rights.

Example

A company whose stock is trading at $25 apiece may offer its shareholders the right for each share held to purchase an additional share at the price of $20 apiece. Along with the rights offering the company will specify the expiration date. The expiration date is generally one to three months from the date that the rights offering is announced.