What Is a Subscription Price?
A subscription price is a static price at which existing shareholders can participate in a rights offering that a public company conducts. Shareholders participate so they are able to retain their proportional ownership of the business. The subscription price will be the same for all shareholders and typically less than the current market price of the underlying stock.
The term may also refer to the exercise price for warrant holders in a particular stock. A company may issue warrants at different times, along with debt offerings. Subscription prices may vary slightly from one owner to another.
- Companies offer existing shareholders securities called "rights," which allow them to buy more new shares in the company.
- The new shares are usually available at a discount to the market price and are available on a date in the future, after the announcement.
- The discounted price that shareholders are offered on the additional new shares is called the "subscription price."
- Companies offer investors this opportunity as a way to allow them to add to their holdings of the stock but at a discount price.
- Rights are typically transferable, meaning the holders of the rights can sell them in the open market.
How Subscription Prices Work
Rights and warrants offerings are specific ways to raise capital although they are less common than a secondary offering or even an initial public offering (IPO) may signal a lack of demand for shares in the open market. Issuing rights encourages more long-term ownership of the company as existing shareholders are increasing their investment in the company.
A rights offering may also come with an oversubscription privilege that allows existing shareholders to pick up any extra rights to shares that other shareholders have not claimed. Rights offerings tend to happen quickly as the subscription price is static and needs to be relevant to the current market price for shareholders to be interested in the deal.
Shareholders can trade the rights on the open market just like ordinary shares, up until the date on which the new shares can be purchased.
Subscription Prices and Public Offerings
Companies offer shares to the public in several ways. Rights and warrants are ways investors can take stakes in companies at certain exercise or subscription prices. In addition, companies can offer shares initially (IPO) on a public exchange, as well as issue secondaries. Smaller companies generally IPO as they look to expand their reach and capital base; however, larger, more established companies also go public for similar reasons to take the next step in their development.
Companies that are cash-poor can use rights issues as a way to generate funding if needed.
A specific set of protocol occurs when gearing up for an IPO, including:
- Selected underwriters forming an external IPO team that consists of the underwriter(s) themselves, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts.
- From here, the team compiles all relevant information on the company, including financial performance, projections of expected future operations, management backgrounds, risks, and competitive landscape. This all becomes part of the company prospectus that the team subsequently circulates for review.
- Finally, the team submits financial statements for official audit, and the company files its prospectus with the SEC. Then a date and price for the offering are set.
Secondary offerings have similar protocol; however, since the company already trades on a public exchange after the IPO, the secondary process includes less information collection and is a more streamlined issuing process.