Everyone loves a VIP invitation to get the inside track on an exclusive offer or event. Well, stock investors are no different; a rights offer (or rights issue) is like a golden ticket, allowing them to buy additional shares at a special, discounted price before the general public has a chance.
When a listed company makes a rights offer, it issues new shares to raise capital, typically to repay debt, fund acquisitions or business expansion, or access working capital.
But rather than selling them on the open market, the company first invites existing shareholders to purchase them, usually at a discounted price.
Why a rights offer is VIP treatment for existing shareholders:
- Discounted price: New shares are typically offered below the current market price. This offers an attractive entry point for increased investment, with greater potential for upside.
- Prevents dilution: By participating, shareholders can prevent their proportional stake in the company from being diluted.
Your VIP Invite
It’s called a rights issue because it’s a corporate action where shareholders receive “rights” to buy these shares proportionally to their current holding within a set timeframe, allowing them to maintain their ownership percentage.
Shares made available in a rights offer are distributed based on existing ownership. For example, a 1-for-5 offer means you can buy one new share for every five you already own.
This offer usually comes in the form of a formal invitation from the company – either a “Rights Offer Circular” or “Letter of Offer” – or a broker notification. The company will also make a formal regulatory announcement (published on SENS for JSE-listed companies).
This notification will include important information such as:
- The Ratio: How many new shares you can buy for every share you currently hold (1-for-5, for example).
- Subscription Price: The discounted price at which you can purchase the new shares.
- Important Dates: The record date, start date, and the final deadline (expiry date) to accept or renounce the offer.
- Instructions: How to pay and participate, including forms for “certificated” (paper) shareholders.
This process ensures shareholders are aware of their options, as they are not obligated to purchase the shares. Investors have three options when a company makes a rights offer:
- Exercise your rights: Pay for and purchase the additional discounted shares.
- Sell your rights: If the rights are tradable, sell them on the exchange to receive value.
- Let your rights lapse: Do nothing and allow the rights to expire, usually resulting in dilution.
Excess Applications
If a rights offer closes and not all investors exercise their rights to purchase, the company may, in certain cases, give participating shareholders an opportunity to apply for these additional rights, which is called an excess application.
Shareholders may receive a percentage of excess rights depending on how many surplus rights are left in the market. If the rights offer is oversubscribed, no excess rights will be allocated to shareholders.
Should You Participate?
Before RSVPing to this VIP invite, it is important to determine why the company is looking to raise new capital.
Just because it’s an exclusive offer doesn’t necessarily make it valuable. While a rights issue to fund expansion via a strategic acquisition could lead to better growth and a higher share price, a company scrambling to access working capital to stay afloat in a turbulent market via a rights issue poses risks to your portfolio.
The reason behind the fundraise matters far more than the discount on offer. Whether you accept, sell, or walk away, the key is to act consciously because doing nothing is still a decision, and it’s usually the most costly one.
