Rights offering

A rights offering gives a company's existing shareholders the right, though not the obligation, to buy new shares directly from the company, usually at a discount to the current market price and in proportion to how many shares they already own. It is a way for a company to raise capital while giving its current owners first opportunity to participate before any new shares are offered more broadly.

Companies often turn to a rights offering when they need capital but face limited access to debt markets or would find a traditional follow-on offering difficult to complete, situations that frequently arise when a company is under financial stress. Because existing shareholders get the first chance to buy at a discount, a rights offering protects them from being diluted without compensation, so long as they choose to exercise their rights.

A shareholder who does not participate will see their ownership stake diluted as new shares are issued to everyone else who did. In some rights offerings, the rights themselves can be sold to other investors rather than exercised, giving shareholders who do not want to invest more capital a way to at least capture some value from the right instead of simply letting it expire worthless.