Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsMedium
A publicly traded company decides to raise additional capital by issuing new shares to existing shareholders at a price below the current market price. This type of offering is known as a:
- ASecondary offering.
- BFollow-on public offering (FPO).
- CStandby underwriting.
- DRights offering.
Show answer & explanationAnswer & explanation
Correct answer: D. Rights offering.
A rights offering gives existing shareholders the opportunity to purchase additional shares directly from the company, typically at a discount to the current market price, to maintain their proportionate ownership. This is a common way for companies to raise capital without diluting existing shareholders' control.
Why the other options are wrong
- A. A secondary offering involves existing shareholders selling their shares, not the company issuing new ones.
- B. An FPO is a general term for a subsequent public offering by an already public company, but 'rights offering' is more specific to this scenario.
- C. Standby underwriting is a type of underwriting agreement in a rights offering, not the offering itself.
Rights Offering
An offering of new shares to existing shareholders, giving them the 'right' to buy additional shares, usually at a discount, before they are offered to the public.
- Preserves existing shareholders' proportionate ownership.
- Shares are typically offered below market price.
- Rights are short-lived and can be traded in the secondary market.
Memory trick: Rights are the 'Right' way for existing owners to get more.