A rights offering is a way for a public company to raise money by giving its existing shareholders the first chance to buy newly issued shares, usually at a price below the current market value. If you own shares in a company that announces one, you receive one right per share, and those rights let you buy additional shares at a discount in proportion to what you already own. You have three choices: exercise the rights and buy the new shares, sell the rights if they are transferable, or let them expire. Doing nothing is the most expensive of the three.
How the Mechanics Work
You receive one right for every share you hold as of a cutoff called the record date. Each right is an option, not an obligation, to buy new shares at a fixed subscription price. That price is almost always set below the stock’s current market price, with discounts of 15 to 30 percent being common.
Every offering also sets a subscription ratio telling you how many rights it takes to buy one new share. At a 5-to-1 ratio, five rights buy one new share, so a shareholder with 500 shares could buy 100 new ones. The ratio keeps the opportunity proportional: every shareholder gets the same chance to hold onto the same percentage of the company.
One detail in the prospectus changes your options significantly: whether the rights are transferable or non-transferable. Transferable rights can be bought and sold on an exchange during the subscription period, so a shareholder who doesn’t want to put up more cash can sell the rights to someone who does. Non-transferable rights can only be exercised or allowed to expire.
The Timeline You Need to Watch
If you own shares on the record date, you receive the rights. Buy shares after that date and you don’t. The subscription period opens once the record date passes, and it closes fast. Most offerings stay open for 16 to 30 days, sometimes up to 60. The New York Stock Exchange requires a minimum of 16 days for listed companies; Nasdaq and OTC markets have no such floor. Miss the deadline and your rights expire worthless.
The stock itself trades in two phases around the offering. Before the record date, shares trade “cum rights,” meaning a buyer also gets the attached rights. On and after the record date, shares trade “ex-rights,” and new buyers no longer receive them. The share price typically drops on the ex-rights date by roughly the value of the detached right.
Your Three Choices
When rights hit your account, you have three paths, and they are not equivalent.
Exercise the Rights
Exercising preserves your proportional ownership. You buy new shares at the subscription price, which is below the market price, so you lock in an immediate paper gain on those shares. You keep the same voting power and the same claim on future dividends. For shareholders who want to stay invested at their current weight, this is the default choice.
Sell the Rights
If the rights are transferable and you don’t want to commit more capital, you can sell them on the open market. The market price of a right roughly equals the difference between the stock’s market price and the subscription price, divided by one plus the number of rights needed to buy one share. Selling shrinks your ownership percentage, but you walk away with cash that partially offsets the dilution.
Let the Rights Expire
This is the worst outcome. You get no cash, no new shares, and your ownership percentage drops anyway because the company has issued more shares to everyone else. There is no scenario in which letting transferable rights expire makes financial sense. Even if you don’t want to buy more stock, selling the rights recovers some value. The shareholders who end up here are the ones who weren’t paying attention.
How to Actually Exercise
The process is simple but time-sensitive. You submit a completed subscription form and pay the full cost of the shares you want to buy. Payment goes to a subscription agent, typically a bank or trust company named in the prospectus, which holds the funds in escrow and issues the new shares after the offering closes.
If your shares sit in a brokerage account, your broker usually handles the paperwork. You will see a notification in your account and can elect to exercise, sell, or let the rights expire through the platform. Don’t assume the broker will act for you. Most brokers let unexercised rights expire by default.
Oversubscription
Many offerings include an oversubscription privilege that lets you request additional shares beyond your basic allotment, drawn from the pool of rights that other shareholders didn’t exercise. You can only use this feature if you first exercise all of your basic rights. If more shareholders request oversubscription shares than are available, the company allocates them pro rata based on how many extra shares each participant asked for. Any excess payment you sent gets refunded.
What Doing Nothing Actually Costs
When a company issues new shares below the market price, the per-share value of every existing share drops. Analysts estimate the post-offering share price using the Theoretical Ex-Rights Price, or TERP. The math: add the total market value of existing shares to the capital raised from the new shares, then divide by the new total share count.
A worked example makes the cost of inaction concrete. A company has 100 shares trading at $10 each, giving a market capitalization of $1,000. It issues 10 new shares at a subscription price of $5, raising $50. Combined value is $1,050 across 110 shares, producing a TERP of roughly $9.55.
A shareholder who exercised bought shares at $5 that are theoretically worth $9.55. A shareholder who did nothing still holds shares that dropped from $10.00 to $9.55, absorbing a $0.45-per-share loss with nothing to show for it. That gap is the cost of inaction, and it scales with the size of the offering.
Tax Treatment
Receiving the rights themselves is generally not a taxable event. Federal tax law excludes most distributions of stock or stock rights from gross income, with limited exceptions for disproportionate distributions and certain preferred stock situations.1Office of the Law Revision Counsel. 26 USC 305 – Distributions of Stock and Stock Rights What matters for your return is what you do with the rights.
If You Exercise
The cost basis of the new shares is generally the subscription price you paid. Your original shares keep their original basis unless you elect to allocate some of it to the rights.
The IRS draws the line at 15 percent. If the fair market value of the rights when distributed is less than 15 percent of the fair market value of your existing stock, the rights have a zero basis unless you affirmatively elect to allocate. If the rights are worth 15 percent or more of the stock’s value, you must allocate basis between the old stock and the rights proportionally based on their respective fair market values.2Internal Revenue Service. Publication 550 – Investment Income and Expenses
If You Sell
Proceeds from selling rights are treated as a capital gain. Whether the gain is short-term or long-term depends on how long you held the original stock that generated the rights, not how long you held the rights themselves. If you didn’t allocate any basis to the rights, the entire sale proceeds are gain.2Internal Revenue Service. Publication 550 – Investment Income and Expenses
If They Expire
Nontaxable rights that expire have no tax basis, and you cannot claim a loss. The rights disappear, and your original stock keeps whatever basis it had before the distribution.
Reading the Announcement
The market often reacts coolly to a rights offering. Issuing new shares below market value tells investors the company needs money and couldn’t get it through channels that don’t dilute existing shareholders, such as debt financing or a private placement. That inference can be unfair when the capital funds growth, but it’s the default read.
The stock price often dips on the announcement itself, before the offering even begins. The anticipated increase in outstanding shares combined with the below-market subscription price creates selling pressure. Earnings per share also drop mechanically after the offering closes, because the same profits are now spread across more shares. For a company already under financial strain, this can turn into a negative loop in which the announcement accelerates the decline the capital was meant to arrest.
Context changes the picture. A rights offering by a stable company funding a promising acquisition reads very differently from one by a company trying to avoid a debt covenant violation. Before deciding whether to exercise, sell, or watch more carefully, look at what the capital is earmarked for and whether the company’s fundamentals support putting more of your money into it.