An Overview of Rights Issues: What Is It and How Does It Work?
In the corporate world, there are various ways for companies to raise new capital to finance their operations and implement growth plans. One of these financing methods is through a process known as a rights issue. In this article, we will take a closer look at what a rights issue is, how it operates, and what advantages and challenges it may present for both the company and investors.
In a rights issue, a company decides to issue new shares on the financial market. This can occur for various reasons, such as financing expansion projects, developing new products or technologies, reducing debt, or strengthening the balance sheet. By offering shares to the public or existing shareholders, the company has the opportunity to attract new capital and broaden its shareholder base.
A rights issue can be carried out either as a directed issue or as a public issue. In a directed issue, the company directs the invitation to buy new shares to specific investors, such as institutional investors or existing shareholders. Here, the regulations stipulate that the company may contact up to 149 individuals (subject to the so-called Dissemination Prohibition in Chapter 1, Sections 7-8 of the Companies Act 2005:55). This can be advantageous if the company has specific investors in mind who can contribute expertise, experience, or industry contacts.
A public issue, on the other hand, means the company offers shares to the general public. This can be an opportunity for individuals to buy shares in a company and become partial owners of the business. To make the offer attractive to investors, the company may sometimes offer the shares at a discounted price or provide other incentives. In this case, it is usually a requirement to prepare a prospectus, which must then be approved by the Financial Supervisory Authority (FI), but as usual, there are exceptions.
A rights issue typically requires the company to enlist the help of an investment bank or a securities firm to facilitate the process. These entities assist in determining the right price and volume for the issue, marketing the offer to potential investors, and handling the legal and administrative aspects of the process. For smaller companies, systems like Invono One can be used to streamline the process.
Pricing, of course, involves a tug-of-war; the company, on one hand, wants as high a price as possible, while investors want to buy as cheaply as possible.
For the company conducting a rights issue, there are several potential benefits. Firstly, the company receives new capital that can be used to finance various growth initiatives. This can include investments in research and development, acquisitions of other companies, expansion into new markets, or infrastructure improvements. Additionally, the rights issue can contribute to improving the company’s financial position by reducing debt and increasing the capital base.
For investors, a rights issue can be an opportunity to purchase shares at a favorable price and become partial owners in a company with growth potential. It can be an interesting investment opportunity for individuals who may not have had the chance to invest in the company before. However, there are also certain challenges and risks for investors to consider, such as uncertainty about the company’s future performance and development, as well as potential dilution effects on share ownership.
In summary, a rights issue can be an effective financing method for companies looking to raise new capital and expand their operations. By offering shares to the public or existing shareholders, an opportunity is created for investors to become partial owners and potentially benefit from the company’s growth and successes. However, it is important (as always!) to carefully evaluate both the company and the potential risks before deciding to participate in a rights issue as an investor.
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