Rights Offerings

Rights offering is another way of raising equity while giving the priority to current shareholders. Each shareholder is given an opportunity to acquire a certain amount of shares (e.g. 0.2 new shares for each currently held share) and to incentivize the participation, new shares are offered at a discount to the market price. Sometimes an oversubscription clause can be included as well, meaning that you can buy more new shares if someone else chose to abstain from exercising their rights. Moreover, it is particularly positive if the offer is backstopped by the management or another major shareholder (this indicates that the stock is worth considerably more in their eyes).

Overall, rights offerings increase the capitalization of the company and sometimes even has a positive effect on price per share, while allowing you to buy shares at a discount. However, it is also important to take into account the size of the offering – what number of new shares will be issued and how much dilution it will cause to existing shareholders. Very large offerings (even at a great discount) are highly dilutive and often result in significant pressure on the share price of the company (participation doesn’t pay off). Therefore, it is useful to check the background and financial position of the issuer as well as run some quick calculations modeling the post-transaction situation of the company.