What is "rights issue"

n. an offering of common stock to existing shareholders who hold subscription rights or pre-emptive rights that entitle them to buy newly issued shares at a discount from the price at which they will be offered to the public later; "the investment banker who handles a rights offereing usually agrees to buy any shares not bought by shareholders" [syn: rights offering]

A rights issue is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a non-dilutive pro rata way to raise capital. Rights issues are typically sold via a prospectus or prospectus supplement. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the issuer at a specified price within a subscription period. In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public).

Rights issues may be particularly useful for all publicly traded companies as opposed to other more dilutive financing options. As equity issues are generally preferable to debt issues from the company's viewpoint, companies usually opt for a rights issue in order to minimize dilution and maximize the useful life of tax loss carryforwards. Since in a rights offering there is a No Sale Theory and no change of control, companies are more able to preserve tax loss carry-forwards than via Follow On offerings or other more dilutive financings.