What Are Cum Rights?
Cum rights (or "with rights") allow a shareholder of record to subscribe to a rights offering declared by a company. Owners of shares that have cum rights are able to buy new shares in a secondary offering, typically at a price lower than the current market price of the shares in question. This additional benefit gives such shares of stock an additional theoretical value.
Cum rights may be contrasted with ex-rights, which are shares that no longer have rights attached to them.
- Cum rights enable existing shareholders to subscribe to a future offering declared by an issuer.
- They give shareholders the option to purchase new shares at a discount in order to maintain their proportionate ownership and avoid dilution.
- Shares that confer such rights are considered to have an additional theoretical value.
How Cum Rights Work
Shares that still have rights available to them are referred to as cum rights. Rights, in this context, refer to the opportunity to purchase more shares of a new issue or offering at a given price. Shares of stock that confer such rights are considered to have an additional theoretical value based on the opportunity represented by those rights.
Should the company seek to raise capital through a rights offering, owners of cum rights shares can maintain their proportionate ownership and avoid dilution. These rights are short-term, typically 30-45 days, and can be traded in the secondary market. Being able to exercise the rights and buy shares at a discount gives the rights holder an immediate gain in value. Selling the rights essentially equates to free money for the shareholder.
The following formula calculates the value of one cum right:
Value = (market price of the stock - subscription price) / (number of rights needed to purchase one share + 1)
The +1 in the denominator adjusts pending a drop in the market price on the ex-date or the first day the stock trades without rights.
Cum rights are subject to NYSE Rule 703.03 and Nasdaq Rules 4310(c) and 4320(e) regarding advance notification periods, proposed subscription prices, expiration dates, and other pertinent information for a shareholder to make a decision. The Securities and Exchange Commission (SEC) requires the filing of Form S-1, a registration statement for the rights offering.
Cum Rights vs. Ex-Rights
A stock that trades with cum rights allows new buyers instead of sellers to collect the rights that have yet to be distributed but are declared. Cum rights shares are rights that are still available. On the other hand, ex-rights shares have already been transferred, exercised, or have expired. Ex-rights are stock shares that allowed the holder to purchase shares at the previously stated price.
Shares trading ex-rights have either passed the expiration of the rights offering period, already been exercised by the original holder, or have been transferred to another party (thus making the rights no longer possible to trade). In any of these circumstances, the shares no longer provide the holder any special privileges.
Ex-rights shares are worth less than shares that are still trading cum rights (not yet ex-rights); ex-rights shares do not give a shareholder access to a rights offering. Renounceable rights may trade separately, allowing shareholders to choose to sell their rights rather than exercise them.
Example of Cum Rights
XYZ Company has 10 million shares of common stock outstanding and is issuing 5 million additional shares through a rights offering. The stock is trading at $51 per share, and the rights have a subscription price of $48 per share. Two rights are needed to purchase one share.
The value of the cum right = ($51 - $48) / (2 + 1) = $1