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Back to the basics: Rights offerings explained

Jeff WilliamsJeff Williams ·

Secondary offerings are, in general, for institutional investors, and that’s not you. It’s pretty hard to get around that, but there is one type of offering you can take part in as an individual, and that’s a rights offering.

A rights offering is simply an issue of rights to existing shareholders that would allow them to purchase additional shares directly from the company. That in mind, you can think of them as secondary offerings, only exclusive to current shareholders rather than institutional investors.

Let’s take a look at a biotech company that issued a rights offering, specifically one proposed by Second Sight Medical Products (EYES), a biotechnology company developing and manufacturing implantable visual prosthetics. Here’s an excerpt of the press release.

Source: Second Sight Medical Products

At the time, Second Sight’s rights offering provided current shareholders with the chance to buy units consisting of one share of EYES, as well as one warrant, which would give the subscribers the right to purchase one share of common stock at the specified subscription price.

That said, the subscription price per unit would be equal to the lesser of $2 or the closing price per share of EYES at the end of the specified period. If you were a shareholder at this time and subscribed to the offering, you would be entitled to one warrant for every share you would have purchased.

Final thoughts

Rights offerings are an interesting play; if you know they are coming and are interested in participating, you can buy the underlying stock so that you can get in on the deal. That said, keep in mind that rights offerings ultimately dilute the stock, which can drop the price in the short-term. Therefore, it’s particularly important to weigh the risk-reward ratio, before jumping into a rights offering.


  Jeff Williams is the lead trader of PennyPro.com. He is a short-term trader of stocks under $10 a share.

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