What is a Rights Offering?

Malcolm Tatum

A rights offering is the offer to sell recently issued shares of common stock to existing stockholders. Generally, an offer of this type extends special pricing per share to each existing investor, with a limit on the number of shares that an individual stockholder can purchase. The rights offering is normally only available for a limited amount of time; once the offer expires, the shares are available for purchase by new investors at the going market rates.

Man climbing a rope
Man climbing a rope

The exact terms and conditions that apply to a rights offering will vary. To some extent, the terms are influenced by prevailing regulations that are in place in the jurisdiction where the company is based. In addition, the bylaws and other formal documents of the business also help to form the structure of the offering, since the documents may include guidelines for the extension of such factors as oversubscription privileges, subscription rights, and other benefits that are provided to shareholders.

When extending a rights offering, the company may choose to handle the notification to shareholders internally, or outsource the process to an investment banker, dealer, or broker. Existing shareholders are notified of the availability of the shares of recently issued common stock, the discount price that is available to current shareholders only, and the time frame in which each shareholder must respond in order to acquire a portion of the new shares. Limits imposed on the number of new shares that any one shareholder can purchase help to minimize the potential for a single shareholder to use the offering as a means of securing a significant bloc of shares, and thus having an inordinate amount of voice and vote in connection with the direction of the company.

After participating in a rights offering, there are usually little to no restrictions on what shareholders can do with those recently acquired shares of common stock. The shareholder may choose to hold onto the shares over the long-term, especially if there are indications that the value of the shares will consistently increase over time. While there may be a waiting period, a shareholder is also free to offer those same shares for sale on any open market, commanding the current market value for each of those shares. The fact that the rights to the shares are transferable can allow a shareholder to quickly earn a return on the acquired shares, even if the market value of those shares is somewhat stagnant at the time of the sale. This is because the shareholder purchased the shares at a discount, then sold them at the higher market rate.

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