In Finance, what is a Subscription Right?
Subscription rights are the rights of current investors in a given company to maintain an equal percentage of ownership in the business. This process involves allowing the investors to exercise a privilege to subscribe to new stock issuances when and as those issuances are announced. In some cases, this subscription right allows investors to secure those new shares below the market price. At other times, the subscriber does pay the market price, but is provided with the opportunity to make the purchase before the shares are offered in the open market.
Also known as a preemptive right or subscription privilege, a subscription right effectively allows shareholders to purchase additional shares as a means of retaining the same level of investment in the business. For example, if a shareholder currently holds a ten-percent stake in the business, he or she will be afforded the opportunity to purchase enough shares of the new offering to maintain that ten percent stake. In most situations, the shareholder must exercise the subscription right within a specified period of time. After the final date of the subscription offer passes, the shares are made available in the open market. If the shares were offered at a price below market value as part of the subscription right, the shareholder will now have to pay full market price in the open market to obtain additional shares.
Notification of a subscription right is issued directly to the shareholder by the company, generally with the use of a mailing that includes the formal announcement and outlines the terms that must be followed to exercise the right. In situations where the shareholder has requested that all announcements be forwarded to a third party, such as a custodian or a broker, the subscription right is delivered to that designated party. While customs vary from one nation to another, businesses that do offer the subscription right will provide shareholders with a period ranging from thirty to ninety days to exercise the option.
A subscription right strategy is often beneficial to both the issuing company and the shareholders. The company is often able to generate revenue from the immediate sale of a significant portion of the newly issued shares, allowing the business to make use of those funds for expansion or any other project desired. Shareholders who are happy with the returns currently received from their investment in the business enjoy the chance to increase those returns as well as retain their percentage in the business.
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