how a rights offering issue works
in a rights offering each shareholder receives the right to purchase a pro rata allocation of additional shares at a specific price and within a specific period usually 16 to 30 days shareholders notably are not obligated to exercise this right a rights offering is effectively an invitation to existing shareholders to purchase additional new shares in the company more specifically this type of issue gives existing shareholders securities called rights which well give the shareholders the right to purchase new shares at a discount to the market price on a stated future date the company is giving shareholders a chance to increase their exposure to the stock at a discount price but until the date at which the new shares can be purchased shareholders may trade the rights on the market the same way that they would trade ordinary shares the rights issued to a shareholder have value thus compensating current shareholders for the future dilution of their existing shares value dilution occurs because a rights offering spreads a company s net profit over a wider number of shares thus the company s earnings per share or eps decreases as the allocated earnings result in share dilution types of rights offeringsthere are two general types of rights offerings direct rights offerings and insured standby rights offerings in some cases rights issued are not transferable these are known as non renounceable rights in other cases the beneficiary of a rights issue may sell them to another party advantages and disadvantages of rights offeringscompanies generally offer rights when they need to raise money examples include when there is a need to pay off debt purchase equipment or acquire another company in some cases a company may use a rights offering to raise money when there are no other viable financing alternatives other significant benefits of a rights offering are that the issuing company can bypass underwriting fees there is no shareholder approval needed and market interest in the issuer s common stock generally peaks for existing shareholders rights offerings present the opportunity to purchase additional shares at a discount sometimes rights offerings present disadvantages to the issuing company and existing shareholders shareholders may disapprove because of their concern with dilution the offering may result in more concentrated investor positions the issuing company in an attempt to raise capital may find that additional required filings and procedures associated with the rights offering are too costly and time consuming the costs of the rights offering may outweigh the benefits cost benefit principle 