Subscription Right

Which statement correctly distinguishes subscription RIGHTS from WARRANTS?

1. A.Rights are short-term with a subscription price below the market price; warrants are long-term with an exercise price above the market price at issuanceCorrect. Rights have intrinsic value the day they are issued, which is why they must be exercised or sold quickly; warrants start out-of-the-money and need time to become valuable.
2. B.Both rights and warrants are issued only to existing common shareholders in proportion to their holdingsOnly rights work that way. Warrants are commonly attached to a new bond or preferred offering and go to those buyers, not to existing shareholders.
3. C.Rights are long-term with an exercise price above market; warrants are short-term with a subscription price below marketThis reverses both features. If rights started above market they would be worthless to the shareholders they are meant to protect.
4. D.Both give the holder voting rights in the underlying company until they are exercisedNeither instrument votes. Voting arrives only when the holder actually exercises and becomes a shareholder.

Why: Rights are issued to existing common shareholders in a rights offering so they can preserve their proportionate ownership. They are short-lived, usually a few weeks, and carry a subscription price BELOW the current market price, which is why they have immediate value. Warrants are long-term, often several years, and are issued with an exercise price ABOVE the market price at issuance, typically attached to a bond or preferred issue as a sweetener.

Ferris Cable offers its existing shareholders the right to buy newly issued shares at a subscription price, and shareholders who exercise send their money to the company. This offering is:

1. A.A primary market transaction, because new shares are issued and the company is paid.Correct. New shares plus proceeds flowing to the issuer is the defining pattern of a primary offering.
2. B.A secondary market transaction, because only existing shareholders may participate.Wrong. Who is eligible to buy does not set the market; what matters is whether the shares are newly created.
3. C.A secondary market transaction, because the rights themselves trade among investors.Wrong. Trading in the rights is a separate secondary market and does not change what the exercise itself is.
4. D.Neither, because no underwriter is distributing the shares to the general public.Wrong. An offering is primary with or without an underwriter, since classification follows the flow of shares and cash.

Why: The primary market is where an issuer sells newly created securities and receives the proceeds. In a rights offering the company issues new shares to shareholders who subscribe and the subscription money goes to the company, so the exercise is squarely a primary transaction. The rights themselves may be listed and traded among investors, and those trades are secondary, but they are a separate matter from the exercise. The company's motive, raising capital while letting existing holders avoid dilution, is precisely what the primary market is for.

In connection with a rights offering, holders of Amberleigh Crown Plc receive transferable subscription rights entitling them to buy new shares, together with interim receipts that will later be exchanged for definitive share certificates. A trainee asks whether these two documents are themselves securities under the Uniform Securities Act. The correct answer is that:

1. A.Both the subscription rights and the interim receipts are securities.Correct. Rights to subscribe and temporary or interim certificates are expressly covered.
2. B.Only the interim receipts are securities, because subscription rights are not transferable instruments of value.Incorrect. These rights are transferable and are named in the definition in any event.
3. C.Neither is a security until the definitive share certificates are issued.Incorrect. The Act reaches the interim documents themselves.
4. D.Only the subscription rights are securities, because interim receipts are administrative documents.Incorrect. Interim and temporary certificates are named in the definition.

Why: The definition covers not only the underlying instruments but also any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of them. Subscription rights and interim receipts are therefore securities in their own right.

An issuer conducting a rights offering hires an investment bank to purchase any shares that shareholders do not subscribe for. This arrangement is best described as:

1. A.An all-or-none offering, since the issue is cancelled if shareholders do not subscribe.Wrong. Nothing is cancelled here, and the whole point of the arrangement is that the offering completes regardless.
2. B.A standby underwriting, under which the bank absorbs whatever is left unsold.Correct. The bank stands ready to buy the unsubscribed portion, guaranteeing the issuer its full proceeds.
3. C.A best efforts underwriting, since the bank merely tries to place the remaining shares.Wrong. Best efforts leaves unsold shares with the issuer, which is exactly the outcome this deal prevents.
4. D.A shelf registration, since shares may be sold after the subscription period closes.Wrong. Shelf registration concerns when securities may be sold, not who buys what shareholders decline.

Why: A rights offering leaves the issuer uncertain about how much money it will raise, since shareholders may simply let their rights lapse. A standby underwriter removes that uncertainty by committing to buy whatever goes unsubscribed, taking the risk of holding shares nobody else wanted in exchange for a fee. That commitment makes the arrangement a form of firm commitment layered onto the rights offering. Without it the issuer would receive only what shareholders chose to subscribe for.