Rights offering
Also known as: subscription rights offering, preemptive rights offering
A rights offering is an issue of new stock in which a company gives its existing shareholders short-term rights to buy the additional shares, usually at a discount to the market price, before the public can. It lets shareholders maintain their proportionate ownership.
A rights offering is how a corporation honors its shareholders' preemptive rights when it issues additional common stock. Before selling new shares to the public, the company distributes one right per outstanding share, giving current shareholders the first opportunity to buy the new stock in proportion to what they already own — so their ownership percentage isn't diluted.
Rights are short-term instruments, typically expiring within 30 to 60 days, and the subscription price is set below the stock's current market price to encourage participation. A shareholder has three choices: exercise the rights and buy the new shares at the discount, sell the rights (they trade separately and have value because of the discounted price), or let them expire. Issuers often line up a standby underwriter that agrees to purchase any shares left unsubscribed.
Exams love to contrast rights with warrants. Rights are short-term, issued to existing shareholders, and exercisable below the market price at issuance. Warrants are long-term (often years), typically attached to bond or preferred stock offerings as a sweetener, and carry an exercise price above the market price when issued.
The Series 7, SIE, and Series 65 exams all test rights offerings — know why they exist (preemptive rights and proportionate ownership), the shareholder's three choices, and the rights-versus-warrants comparison.
Key takeaways
- A rights offering gives existing shareholders the first chance to buy newly issued shares in proportion to their current holdings.
- Shareholders receive one right per share owned, and the subscription price is set below the current market price.
- Rights can be exercised, sold, or allowed to expire, and they are short-term — usually 30 to 60 days.
- Rights differ from warrants, which are long-term and priced above the market at issuance.