ShaneMcLean.com

Information on legal and business topics from Canadian business lawyer Shane McLean

Rights offerings — an old new way to raise money

Posted by Shane McLean on November 12, 2009

In the past 6 months or so I have had a number of clients ask about the possibility of raising funds by way of  a rights offering.  In late October we even filed a preliminary prospectus for one of our TSX Venture Exchange listed clients in connection with a proposed rights offering.  Public markets have seen a bit of a resurgence lately but we all know how abysmal things have been over the last while and so I think more companies are  looking at creative ways to raise funds and have been looking to the rights offering as one alternative.

In a “rights offering” a corporation issues “rights” to its existing shareholders. The rights entitle those existing shareholders to acquire additional shares (or some other form of security) from the corporation for a fixed exercise price over a fixed period of time (called the rights offering period).  When issued by a public company, the rights will typically trade  as separate securities on the same exchange as the company’s shares for the duration of the rights offering period.

Companies often look at rights offerings as a way to provide a presumably willing audience — i.e. those who have already bought the company’s shares — with an ability to buy additional shares directly from the company.  To sweeten the deal and encourage exercise of the rights, the rights are often issued with an exercise price at a discount to the market price of the common shares and may also entitle the exerciser to receive a warrant, preferred share or some other security in addition to the common share on exercise of the right. The “sweeter” the deal, the more likely  the rights will have some trading value, thereby enriching your shareholders just by issuing them, and the more likely they will ultimately be exercised prior to the end of the rights offering period.

Rights offerings of smaller sizes can often be done without prospectus under applicable Canadian securities laws but larger offerings will usually require a prospectus.

Rights offerings seem to have had a mixed reputation in the past with some viewing them as a fund raising method of last resort.  For example, I was told by someone at the TSX Venture Exchange that for many years they have only seen one or two a year on the exchange.  Recently, however, there seems to be a renewed interest in this fund raising vehicle and it’s worth a second look for any company looking to raise funds.

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