Series 7: 1.4.2 Subscription Rights

1.4.2  Subscription 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. An issuer may hold a rights offering if it needs money but is having difficulty getting financing. Companies may also hold a rights offering to fulfill their obligation to shareholders who hold pre-emptive rights, or to fulfill the provisions of an anti-dilution agreement. Anti-dilution agreements give investors the right to maintain their percentage share in the company in the event new shares are issued. In a rights offering, 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 given to investors 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 in that it offers the holder the right to buy a share at a particular price. However, rights have a shorter life than warrants, usually two to four weeks. The rights holder may decide to ignore the rights offering and let the rights expire. If the rights are transferable, the holder may sell them on an exchange. 

While each shareholder is typically given one right for each share of stock owned, it usually requires several rights to be able to buy one share of new stock. Holding rights gives a shareholder the opportunity to buy new shares, but the sharehold