Securities Law Blog

The vitality of the emerging growth market hinges on creating financing and liquidity opportunities. This blog post and the PowerPoint presentation linked to this post examine various issues relating to rights offerings and the special combination of pre-offering marketing, dynamic pricing and a public backstop that make rights offerings attractive to issuers and investors. One primary attraction to rights offerings is that an issuer can raise desired capital while participating shareholders don’t suffer dilution.

Here are the six questions every issuer should ask to determine it is ready for a rights offering:

1. In this current market environment, why do rights offerings work? 2016 was a choppy time in the public markets for raising capital. Some companies sought private funding, such as a PIPE, but found investors looking for registered securities and more liquidity; registered directs didn’t help with liquidity either and both PIPEs and registered directs potentially add selective disclosure and shareholder approval issues. Conversely, rights offerings have evolved into a transformative corporate transaction providing an opportunity to raise capital from existing shareholders first, then from the general public, via a streamlined registration on Form S-1 or shelf takedown with a built-in best efforts standby underwriting for outside investors, and issuers can generally avoid the disclosure and voting issues.
2. How can you mitigate the risk of an unsuccessful offering upfront? All financings are judged ultimately by their success in raising proceeds. Rights offerings by their nature would appear to be a risky endeavor since existing shareholders could choose not to participate. For this reason, effective pre-offering marketing can bring in new shareholders that want to participate in the rights offering and especially in the over-subscription privilege. In our experience, having an investment banker serving as dealer-manager who understands this process is critical to the success of the rights offering.
3. What preparatory steps can you take to accelerate the process? If a company is contemplating conducting a subscription rights offering to its shareholders during the first half of 2017, then, depending on its market capitalization, it may want to consider filing a shelf registration statement that covers the offer of subscription rights. Even if a company’s market capitalization is too low to make the utilization of a shelf registration statement feasible, due to streamlined “incorporation by reference” disclosure rules and creative use of Rule 415, rights offerings can be effectuated quickly.
4. How do you determine the subscription price with volatile market prices? Pricing can be determined prior to the record date and offering launch or during the subscription period to build in a modest discount to the current market price. Again, an experienced dealer-manager is critical to this process.
5. Can an NOL tax benefit be protected in a rights offering? Rights offerings are frequently structured to protect NOLs from disproportionate ownership changes. Legal counsel, accountants and the company’s finance team typically work with the dealer-manager on these terms.
6. Should shareholders have a right to transfer rather than exercise or let rights expire? In the vast majority of rights offerings, the subscription rights may not be sold or transferred, and the rights are not listed for trading on any stock exchange or trading market. But, non-controlling shareholders may favor creating a market in the rights, which could increase the likelihood of a full subscription. An experienced dealer-manager can provide guidance on this aspect of the rights offering.

Our Powerpoint presentation, “Registered Subscription Rights Offerings: The Most Democratic Capital Raising Transaction” can be accessed here.