Rights offerings are an alternative method for public companies to raise capital from existing stockholders. In a rights offering, the issuer grants a right to each of its existing stockholders for no consideration. The right, which is usually nontransferable, entitles the stockholder to subscribe for a share of common stock at a set price, typically at a discount from the trading price for the issuer’s shares. The shares underlying the purchase rights must be registered using Form S-1 or Form S-3 for the company to comply with securities laws and for the stockholders to be able to freely sell the shares.

A rights offering can be an attractive alternative when the market for a company’s shares is particularly volatile and the company’s stockholders are sensitive to dilution. With the addition of a backstop commitment or standby purchaser, the company can have more certainty about the amount of capital being raised. A standby purchaser is an existing stockholder or third party that agrees to purchase any shares not subscribed for by the stockholders in the rights offering. Companies undertaking a rights offering do not have to engage an investment bank to serve as a placement agent or underwriter but may choose to do so or use the investment bank as a standby purchaser.  

Pros:

  • Limited dilution to existing stockholders - All stockholders have the opportunity to maintain their ownership in the company without the potential dilution of a traditional offering.
  • Less time commitment from management team - The rights offering is made to existing stockholders; management time and energy are not devoted to the roadshow.
  • Set subscription price - Once the subscription price is set, the price is not subject to changes in the trading price for the company’s common stock.
  • No prior stockholder approval - Rights offerings are not subject to the NYSE or Nasdaq rules requiring stockholder approval for non-public offerings resulting in an issuance of 20% or more of the issuer’s outstanding common stock.
  • Limited transaction expenses - If no investment bank is engaged to help facilitate the offering, the issuer is able to utilize more of the capital raised.

Cons:

  • No guaranteed amount of capital to be raised - Stockholders must subscribe for shares for funds to be raised unless using a backstop commitment or standby purchaser.
  • Less attractive pricing - Set subscription price is typically at a discount to the trading price and must be attractive enough from the stockholders’ perspective to motivate their investment.
  • Potential concentration of ownership - If only a few large stockholders subscribe for shares, ownership can become concentrated in those large stockholders, potentially limiting the voting power of others.
  • Must comply with “Baby Shelf” rules - Issuers with a non-affiliate market cap of less than $75 million must limit the size of all offerings over a rolling 12-month period to one-third of their current public float. This ceiling may make this option less appealing for small-cap or micro-cap issuers.
  • Longer offering period - Because of the built-in open window for stockholders to subscribe for shares, a rights offering takes longer than a takedown offering, and if using Form S-1 to register the shares, can take as long as a traditional IPO depending on the level of SEC review and the company’s preparedness.

Before structuring a rights offering, a company should consider:

  • Support of existing stockholders
    • A rights offering is a good option for an issuer with a stockholder base that is committed to management’s vision and willing to inject more capital in the company.
    •  A rights offering would be a more challenging option for a company with many stockholders that are disengaged from the company’s progress.
  • Baby Shelf rules
    • Issuers subject to the “Baby Shelf” rules are not permitted to sell more than one-third of their non-affiliate market cap during any trailing 12-month period.
    • This capacity is re-measured before any potential shelf offering and can fluctuate based on the market price of the issuer’s shares and the issuer’s affiliates’ holdings.
  • NSYE or Nasdaq requirements
    • Although rights offerings are not subject to the 20% rule, exchanges still have notice requirements for listing additional shares.
    • Failure to meet the notice requirements in a timely fashion can slow down the progress of the offering.

Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2021 Harter Secrest & Emery LLP

Disclaimer

This website presents only general information not intended as legal advice. Although we encourage calls, letters and emails from prospective clients, please keep in mind that merely contacting Harter Secrest & Emery LLP (HSE) does not establish an attorney-client relationship between us. Confidential information should not be sent to HSE until you have been notified in writing by HSE that a formal attorney-client relationship has been established. Information sent to us before then may not be treated as confidential by HSE or the court.

I have read this and agree     Cancel

Our website uses cookies. By continuing to use our site, you agree to our use of cookies in accordance with our Privacy Policy.