Rights offerings

Companies go public to raise capital for their business, but what happens when those companies that already went public through an IPO require additional capital to fund their operations? They can do so by issuing rights or warrants.

Rights offering

Refers to a type of offer made by publicly-listed companies to their existing shareholders the right but not the obligation to purchase additional shares of the company at a discounted price (to market price) on a stated future date for the purpose of raising capital. Rights offerings flood the market with additional shares, diluting the value of existing shares and decreasing the company’s earnings per share (EPS).

Let’s make it easier to understand by using an example:

Steve owns 200 shares in Company XYZ, each share is currently trading at a  price of $7 per share. The company issues a right offering to raise $50 million for the purpose of funding a new expansion project. To raise the required amount, the company is issuing 10 million shares at a price of $5 per share.

Shareholder options

As the name describes, right offerings give existing shareholders the right, but not the obligation to exercise their offer. (To buy shares set at the predetermined right offering’s price)

Some investors may sell their rights through a stock exchange or  simply let them expire if it’s not favourable to exercise the right (Similarly to a call option)

Right offerings typically expire within 1-3 months from the time the offer becomes available.

If you obtain or are entitled to receive right offerings, you can visit the company’s investor relations website to learn more about the offer. Each right offering has its own terms.

Most traders who obtain rights will generally:

• Exercise the right to obtain the shares (if it is favourable to do so before expiration)
  
• Sell the rights back into the open market (rights trade up until expiry, just like an option contract)
  
• Let the rights expire worthless