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Stock Rights Offering Issue: Definition – Overview

What Is a Stock Rights Offering and Issue?

Stock Rights OfferingA stock rights offering is an opportunity granted to existing shareholders to acquire more stock shares in proportion to their current holdings.  The new shares are known as subscription warrants and are considered a sort of option.  A stock warrant is issued directly by the company in question.  When an investor exercises a stock warrant, the shares that satisfy the obligation are obtained directly from the firm rather than through another investor. Rights offerings grant investors in a firm the right, but not the obligation, to acquire more shares in the company. The subscription price at which each share may be acquired in a rights offering is often reduced relative to the current market price. Rights are frequently transferrable, which allows the possessor to sell them on the open market.

In simple terms, a stock rights offering is a way for companies to raise money. Aside from posting earnings, businesses generate funds in two ways.  Either by borrowing or by selling ownership holdings in the firm. The former entails issuing bonds (IOUs), whereas the latter entails issuing shares. A stock rights offering addresses current shareholders and gives them the option to purchase more shares of stock.  The offering period is for a limited time, which can range from a few weeks to a few months. Companies might further entice investors to buy additional shares by offering them at a discount.

Stock Rights Offering

A rights offering occurs when a company issues “rights” to existing shareholders that entitle them to buy additional shares directly from the company in proportion to their existing holdings within a prescribed time period. Companies will announce an expiration date by which shareholders must buy into the rights offering, generally one to three months from the date the company announces a rights offering. The price at which each share may be purchased is generally at a discount to the current market price. Rights are often transferable, allowing shareholders to sell them on the open market. Companies generally offer rights when they need to raise money. (Source: finra.org)

Stock Rights Offering – A Closer Look

In stock rights offerings each shareholder obtains the opportunity to acquire a pro-rata allotment of extra shares.  These are offered at a specified price and within a specific time frame, usually 16 to 30 days. Shareholders are not required to exercise this entitlement. A rights offering is essentially an invitation to current shareholders to buy more new shares in the firm. More specifically, this sort of issuance grants current shareholders securities known as “rights“.  As the name implies, these rights allow current shareholders the opportunity to acquire new shares.  Often, these new rights offerings are available at a discount to the current market price. In effect, the corporation is allowing shareholders to expand their exposure to the shares at a reduced price.

However, until the new shares are available for purchase, shareholders may trade the rights on the market.  This is done in the same manner that they would trade ordinary shares. The rights granted to a shareholder have monetary worth.  This compensates present shareholders for the eventual erosion of the value of their existing shares. Dilution happens when a company’s net profit is dispersed over a larger number of shares.  Ultimately, a new rights issue results in share dilution. As a result, earnings per share (EPS) decrease as the available number of shares increases.

Rights offers are analogous to trading stock options in several ways. Shareholders have the choice to buy or sell shares of a stock but are not compelled to do so. It’s the same with rights issues. Shareholders have the option to purchase additional shares of the company’s stock but are not required to do so. Often, they can even sell the rights to purchase the shares to another investor if they wish. However, the entity initiating the rights sale may make the rights non-transferable.

Types of Stock Rights Offering

There are two general types of rights offerings: direct rights offerings and insured or standby rights offerings. In some circumstances, granted rights are not transferrable. These are referred to as “non-renounceable rights.” In other situations, the rights issue recipient may sell them to another person.

Direct Stock Rights Offering

A direct rights offering occurs when a firm grants rights to its shareholders and sells just the shares that the shareholders want to purchase. If any of the rights are not exercised, the corporation does not sell the shares. Because of this form of sale, a firm may raise less cash than anticipated. A direct rights offering is ideal for organizations that wish to raise cash but do not have a set sum in mind.

Insured Stock Rights Offering

In the case of an insured rights offering, the issuing business engages with a third party, such as an investment bank. Each existing shareholder has the same right to acquire more shares in this sort of sale. However, if any shareholders do not use their entitlement, the third party who has guaranteed the shares will buy them instead. The issuing firm is assured to raise the money that it hoped for with this sort of issuance. This sort of rights offering is ideal for businesses that require a specified amount of funding or prefer a guaranteed outcome.

Advantages & Disadvantages

Companies generally offer rights when they need to raise money. For example, when there is a need to pay off debt, purchase equipment, or acquire another firm. When there are no other feasible financing options, a corporation may utilize stock rights offerings to generate money in specific instances. Another key advantage of a rights offering is that the issuing business may avoid paying underwriting costs.  Also, there is no requirement for shareholder approval, and market interest in the issuer’s ordinary shares typically peaks. Existing shareholders can take advantage of rights offers to acquire more shares at a reduced price.

  • Raises capital – A rights offering may be an efficient approach for a company to get more funds for expansion, capital expenditures, and other uses.
  • Shareholders can maintain their current ownership stake – As a shareholder, you are offered a proportional number of shares according to your investment in the firm. If you choose, you can accept the offer and maintain your present ownership stake.
  • Affordable for the issuing company – Because of lesser administrative costs and less marketing, rights offers might be more economical than other equity issuance.

Disadvantages

Rights offers can sometimes be detrimental to both the issuing firm and current shareholders. Shareholders who are concerned about ownership dilution may object. Conversely, as a result of the offering, investor holdings may become more concentrated. In an attempt to acquire cash, the issuing firm may discover that the additional needed paperwork and processes involved with the rights offering are too costly and time-consuming.  As a result, the costs of the rights offering may outweigh the advantages.

  • Dilution of the existing shares – A rights sale increases the number of outstanding shares but not the company’s worth.  As a result, the value of each existing share is diluted.
  • Reduces ownership of non-participating shareholders – Shareholder ownership in the firm will be reduced if they do not acquire the shares offered.
  • No guarantees on the amount of capital raised – In the event of a direct rights offering, the firm sells just the number of shares that its shareholders choose to purchase. This might be less than what the corporation had intended to sell.

Up Next: Cornering the Market – What Does “Corner the Market” Mean?

Cornering the MarketCornering the market is acquiring and holding or owning enough stocks, assets, or commodities to effectively manipulate the market price.  Typically, it entails acquiring a sufficient number of a company’s shares or owning a big enough commodities position to control its price. The phrase means that the market has been pushed into a corner and has nowhere to go to locate additional vendors and buyers. To be able to corner a market, an investor must have tremendous financial resources.  This is because it entails owning a controlling interest in the physical assets. It may also refer to amassing a substantial proportion of economic activity in a certain area. For example, a telecom company that controls 90% of the wireless industry is considered to have cornered the market.

In its most basic form, cornering the market occurs when someone purchases all or most of the available supply of a security or commodity. This creates an artificial scarcity, which drives up the price. As a result, the market manipulator can profitably sell some of his holdings at a huge profit. There are several approaches to cornering a market. The easiest way is to purchase and stockpile a large percentage of a specific commodity. Cornering is more easily performed in the futures trading market than in any other market. For example, an investor may acquire a large number of futures contracts for a specific commodity.  In turn, the resulting scarcity may artificially inflate the price.  Eventually, the manipulator can divest his holdings reaping a large profit in the process.

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