What’s a subscription right in finance?

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Subscription rights allow current investors to maintain their percentage of ownership in a company by purchasing new shares at a discounted price before they are offered on the open market. This benefits both the company and shareholders.

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 investors to exercise a privilege to subscribe to new issues of shares when and when those issues are announced. In some cases, this subscription right allows investors to secure those new shares below the market price. At other times, the underwriter pays the market price, but is given the opportunity to make the purchase before the shares are offered on 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 owns a ten percent interest in the business, they will be given the opportunity to purchase enough shares of the new offering to maintain that ten percent interest. In most situations, the shareholder must exercise the subscription right within a specified period of time. After the end date of the subscription offer, the shares are available on the open market. If the shares were offered at less than market value as part of the subscription right, the shareholder will now have to pay the full market price on the open market to obtain additional shares.

The notification of a subscription right is issued directly to the shareholder by the company, generally with the use of a mail that includes the formal announcement and describes the terms that must be followed to exercise the right. In situations where the shareholder has requested that all announcements be sent to a third party, such as a custodian or broker, the subscription right is given to that designated party. Although customs vary from nation to nation, companies offering the subscription right will provide shareholders with a period of 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 can often generate income from the immediate sale of a significant portion of the newly issued shares, allowing the company to use those funds for expansion or any other desired projects. Shareholders who are happy with the returns they currently receive from their investment in the business enjoy the opportunity to increase those returns, as well as retain their percentage in the business.

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