Rights Offering: What it is & types?

Key Highlights

A rights offering is when a company gives its current shareholders a special opportunity to buy more shares- usually at a lower price- before those shares are made available to others.
Types of rights offerings includes direct and standby/insured rights offering.

What is Rights Offering?

A rights offering is when a company gives its current shareholders a special opportunity to buy more shares- usually at a lower price- before those shares are made available to others. This method helps existing shareholders keep the same share of ownership in the company, while also giving the company a way to bring in fresh funds.

Key Features

Proportional Allocation: Each shareholder receives the right to buy a certain number of new shares based on their existing ownership percentage.
Discounted Price: The subscription price for the new shares is typically set below the prevailing market price, making the offer attractive to shareholders.
Limited Time Frame: Rights are valid for a specific period, usually between 16 and 30 days, after which they expire if not exercised.
Optional Participation: Shareholders are not obligated to exercise their rights; they may let them expire or sell them.
Dilution Protection: By participating, shareholders can avoid dilution of their ownership stake, which would otherwise occur if new shares were issued to outside investors

Types of Rights Offerings

Direct Rights Offering: Only the shares shareholders buy get issued- no backup buyers involved.
Standby/Insured Rights Offering: If some shareholders pass, a third party (like an investment bank) steps in to buy the leftover shares, guaranteeing the company gets the cash it needs.

Why Do Companies Do This?

Companies use rights offerings to raise money for all sorts of goals- paying off debt, expanding operations, or even buying another business. It’s a go-to move when other funding options, like loans or new investors, aren’t the best fit.