Subscription Right

A subscription right is the right of existing shareholders in a company to retain an equal percentage ownership by subscribing to new stock issuances at or below market prices. The subscription right is usually enforced by the use of rights offerings, which allow shareholders to exchange rights for shares of common stock at a price generally below what the stock is currently trading for.

Also known as the "subscription privilege," "preemptive right" or "anti-dilution right" of the shareholder.

Subscription rights are not necessarily guaranteed by all companies, but most have some form of dilution protection in their charters. If granted this privilege, shareholders may purchase additional shares on a pro-rata basis before they are offered to the secondary markets. This form of dilution protection is usually good for up to 30 days before a company seeks new investors in the broader market. If shareholders do not exercise their subscription rights, their ownership will be diluted. Most subscription rights are not transferable unless allowed by the issuer. If they are transferable, they can be traded on an exchange. Also, oversubscription rights are offered in some cases whereby shareholders who have fully exercised their rights can subscribe to additional shares, again on a pro-rata basis.

If at least 20% of the shares outstanding are offered at a discount, the SEC does not require that the shareholders formally approve the subscription rights offering. Investors receive notification of their subscription right by mail (from the company itself) or through their brokers or custodians.

Subscription rights offerings can be structured in a number of ways. On Dec. 22, 2017, Schmitt Industries completed an offering in which 998,636 common shares were issued. The company issued one right for each common share, and holders of the rights were entitled to purchase common shares by exchanging three rights and $2.50 for each share desired. The offering was oversubscribed, and available oversubscription shares were allocated pro-rata among those who fully exercised their rights in the original offering.