Loading the player...

What is a 'Rights Offering (Issue)'

A rights offering is a group of rights offered to existing shareholders to purchase additional stock shares, known as subscription warrants, in proportion to their existing holdings.  In a rights offering, the subscription price at which each share may be purchased is generally discounted relative to the current market price. Rights are often transferable, allowing the holder to sell them in the open market.

BREAKING DOWN 'Rights Offering (Issue)'

In a rights offering, each shareholder receives the right to purchase a pro rata allocation of additional shares at a specific price and within a specific period (usually 16 to 30 days). Shareholders are not obligated to exercise this right.  

Types of Rights Offerings

There are two general types of rights offerings: direct rights offerings and insured/standby rights offerings.  In direct rights offerings, there are no standby/backstop purchasers (purchasers willing to purchase unexercised rights) as the issuer only sells the number of exercised shares.  If not subscribed properly, the issuer may be undercapitalized.  Insured/standby rights offerings, usually the more expensive type, allow third-parties/backstop purchasers (e.g. investment banks) to purchase unexercised rights.  The backstop purchasers agree to the purchase prior to the rights offering.  This type of agreement ensures the issuing company that their capital requirements will be met.  

Rights Offering Advantages

Companies generally offer rights when they need to raise money. Examples include when there is a need to pay off debt, purchase equipment, or acquire another company. In some cases, a company may use a rights offering to raise money when there are no other viable financing alternatives.  Other significant benefits of a rights offering are that the issuing company can bypass underwriting fees, there is no shareholder approval needed, and market interest in the issuer's common stock generally peaks. For existing shareholders, rights offerings present the opportunity to purchase additional shares at a discount.

Rights Offering Disadvantages

Sometimes, rights offerings present disadvantages to the issuing company and existing shareholders.  Shareholders may disapprove because of their concern with dilution.  The offering may result in more concentrated investor positions.  The issuing company, in an attempt to raise capital, may find that additional required filings and procedures associated with the rights offering are too costly and time-consuming; the costs of the rights offering may outweigh the benefits (cost-benefit principle)

RELATED TERMS
  1. Subscription Right

    A subscription right is the right of existing shareholders in ...
  2. Renounceable Right

    A renounceable right is an offer issued by a corporation to shareholders ...
  3. Preemptive Right

    A preemptive right is a privilege extended to select shareholders ...
  4. Theoretical Value (Of A Right)

    The calculated value of a subscription right. The theoretical ...
  5. Backstop Purchaser

    A backstop purchaser is an entity that agrees to purchase all ...
  6. Bundle Of Rights

    A bundle of rights is a set of legal rights afforded to the real ...
Related Articles
  1. Know Your Shareholder Rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company.
  2. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  3. Managing Wealth

    Issued share capital versus subscribed share capital

    Learn the difference between issued share capital versus subscribed share capital. Get information about various types of capital.
  4. Trading

    Stock Futures vs. Stock Options

    A quick overview of how stock futures and stock options work and why you would pick one over the other depending on the strategy being used.
  5. Investing

    Adjusting Price Charts To Secondary Offerings

    Secondary offerings may require rapid readjustment of trading strategies.
  6. Investing

    Why Do Companies Care About Their Stock Prices?

    A company's stock price reflects the company's earnings potential, its future viability, determines management compensation can play a critical role in mergers and acquisitions.
  7. Managing Wealth

    Keeping Control of Your Business After the IPO

    Taking a company public doesn't mean founders must completely give up calling the shots. Before the IPO, consider these tactics to keep control after it.
  8. Trading

    Warrants: A Risky But High-Return Investment Tool

    Discover the advantages and disadvantages of warrants, a largely unexploited investment vehicle.
RELATED FAQS
  1. What can shareholders vote on?

    Understand the usual voting rights of common stock shareholders, along with the importance of shareholders exercising their ... Read Answer >>
  2. What happens to the shares of stock purchased in a tender offer?

    Learn what a tender offer is, whether it is a good idea to accept a tender offer and what happens to the shares of stock ... Read Answer >>
  3. Why is an increase in capital stock on a company's balance sheet a bad sign for stockholders?

    Understand what capital stock represents for a company and understand the significance for investors when a company initiates ... Read Answer >>
  4. What are the advantages and disadvantages of preference shares?

    Learn about the advantages and disadvantages of preference shares for both investors and issuing companies. Read Answer >>
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center