Series 79: Rights

Rights

Sometimes companies decide to raise money by carrying out a rights offering, also called a rights issue, in which the company sells new shares to current shareholders only. A company may hold a rights offering if it is strapped for cash and unable to borrow. Current shareholders are offered the right to purchase enough additional stock to keep their ownership in the company proportionate to what it was before the rights offering. Usually, a rights offering entitles stockholders to buy the additional shares at a discount to the market price. The rights sold in a rights offering may be referred to as subscription rights or simply rights. It is important to realize that a right gives the holder a right to, but not an obligation to, purchase additional shares. A subscription right is similar to a warrant but has a shorter life, usually two to four weeks. The holder may decide to ignore the rights offering and let the rights expire. Sometimes, the holder may transfer the rights to others by selling them.

An insured rights offering is one where a standby underwriter agrees to buy any rights that weren’t exercised during the rights offering. An insured rights offering