Rights offering

A rights offering is a way for a company to raise equity by granting each existing shareholder rights to buy additional shares at a set subscription price, usually below the market price, in proportion to what they already own. Shareholders who exercise keep their ownership percentage; those who do not are diluted.

How it works

The company sets a record date, a ratio (for example, one right per share, with four rights needed to buy one new share), a subscription price and an expiration date, typically a few weeks out. Rights can be transferable, in which case they trade separately and holders can sell them, or non-transferable. Many offerings include an oversubscription privilege that lets holders buy shares others did not take. Some are backstopped by a large investor who agrees to buy any unsubscribed shares. Rights offerings are common in closed-end funds, banks and companies in restructuring, and are more common in Europe than in the US.

Why it matters for traders

The discount and the size of the raise both matter. A deep discount effectively forces holders to participate or accept dilution, and the stock usually trades down toward a blended price after going ex-rights. Watch who is providing the backstop: a backstop fee or the right to buy a large block can shift control. Check whether the rights trade, since an unexercised right that could have been sold is value thrown away.

Example

Hypothetical Northwind Bancorp (NWBC) has 20 million shares at $20. It offers one new share for every four held at $16, raising up to $80 million on 5 million new shares. The theoretical ex-rights price is (20M x $20 + 5M x $16) / 25M = $19.20. A holder of 400 shares who exercises pays $1,600 for 100 shares and owns 500 shares worth $9,600, the same as the $8,000 plus $1,600 cash beforehand.

FAQ

What happens if I do not exercise my rights?

If the rights are transferable you can sell them. If they expire unused, you keep your shares but own a smaller percentage of the company.

Is a rights offering dilutive?

It increases the share count, but holders who fully exercise keep their percentage ownership. Non-participants are diluted.