Rights Offering (Issue)

What Is a Rights Offering (Issue)?

A rights offering (rights issue) is a group of rights offered to existing shareholders to purchase extra stock shares, known as subscription warrants, in proportion to their existing holdings. These are viewed as a type of option since it gives a company's stockholders the right, however not the obligation, to purchase extra shares in the company.

In a rights offering, the subscription price at which each share might be purchased is generally discounted relative to the current market price. Rights are frequently transferable, permitting the holder to sell them in the open market.

How a Rights Offering (Issue) Works

In a rights offering, every shareholder gets the right to purchase a pro-rata allocation of extra shares at a specific price and inside a specific period (normally 16 to 30 days). Shareholders, strikingly, are not committed to exercise this right.

A rights offering is really an invitation to existing shareholders to purchase extra new shares in the company. All the more specifically, this type of issue gives existing shareholders securities called "rights," which, indeed, give the shareholders the right to purchase new shares at a discount to the market price on a stated future date. The company is allowing shareholders an opportunity to increase their exposure to the stock at a discount price.

Yet, until the date at which the new shares can be purchased, shareholders might trade the rights on the market the same way that they would trade ordinary shares. The rights issued to a shareholder have value, subsequently compensating current shareholders for the future dilution of their existing shares' value. Dilution happens in light of the fact that a rights offering spreads a company's net profit over a more extensive number of shares. Subsequently, the company's earnings per share, or EPS, diminishes as the allocated earnings bring about share dilution.

Types of Rights Offerings

There are two general types of rights offerings: direct rights offerings and safeguarded/reserve rights offerings.

• In direct rights offerings, there are no standby/backstop purchasers (purchasers able to purchase unexercised rights) as the issuer just sells the number of exercised shares. On the off chance that not subscribed properly, the issuer might be undercapitalized.
• Safeguarded/backup rights offerings, normally the more costly type, permit outsiders/backstop purchasers (for example investment banks) to purchase unexercised rights. The backstop purchasers consent to the purchase prior to the rights offering. This type of agreement guarantees the responsible company that their capital requirements will be met.

Now and again, rights issued are not transferable. These are known as "non-renounceable rights." In different cases, the beneficiary of a rights issue might sell them to another party.

Rights Offering Advantages

Companies generally offer rights when they need to fund-raise. Models incorporate when there is a need to pay off debt, purchase equipment, or get another company. At times, a company might utilize a rights offering to fund-raise when there could be no other reasonable financing alternatives. Other critical benefits of a rights offering are that the responsible company can sidestep underwriting fees, there is no shareholder approval required, and market interest in the issuer's common stock generally tops. For existing shareholders, rights offerings present the opportunity to purchase extra shares at a discount.

Rights Offering Disadvantages

In some cases, rights offerings present weaknesses to the responsible company and existing shareholders. Shareholders might disapprove due to their concern with dilution. The offering might bring about more focused investor positions. The responsible company, trying to raise capital, may find that extra required filings and procedures associated with the rights offering are too costly and tedious; the costs of the rights offering might offset the benefits (cost-benefit principle).

Features

• In a rights offering, every shareholder gets the right to purchase a pro-rata allocation of extra shares at a specific price and inside a specific period (typically 16 to 30 days).
• A rights issue is an invitation to existing shareholders to purchase extra new shares in the company.
• Destitute companies can go to rights issues to fund-raise when they truly need it.
• Shareholders are not committed to exercise this right.