What is a Rights Offering?

A rights offering is a notification by a company to its shareholders, giving them the right to buy more shares. The amount of additional shares that shareholders are able to purchase is in proportion to their existing share holdings. Each of these rights has a termination date, which is usually within one month. Other features that may be added to a rights offering are:

Shares can be purchased at a discount to the market price
The rights can be transferred to a third party, so that they can be sold on the open market

A rights offering is usually issued by a closely-held company. In this situation, shareholders are more likely to want to maintain their existing proportion of total shares outstanding, in order to maintain their ownership percentage in the business. However, there is no obligation for them to do so. If they do not take advantage of a rights offering, then their ownership share of the business will decline.

When to Issue a Rights Offering

A rights offering can be expensive for the issuer, since equity is the most expensive form of funding. Consequently, a rights offering is more likely to be issued when it is not possible to acquire any additional debt. This situation arises when a lender demands that a business obtain more equity before it will consent to the issuance of any additional debt.