The special situation world is saturated with spinoff stock investors and M&A arbitragers, but many people seem to be overlooking a very lucrative area of the event driven landscape – subscription rights for shares.
While maybe not as high profile as major spin-off winners or large cap mergers, subscription rights often provide the chance for investors to capitalize on almost formulaic movements in share prices. The returns can be very large – 140% in the case of Rafael Holdings – and these returns are often achieved in just a couple of weeks.
So, what do special situations investors need to know to capitalize on these opportunities?
That’s what I want to lay out for you below. In this article, I’m going to walk you through exactly what share rights are, common price movement patterns, and key considerations if you’d like to earn some quick cash.
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Should I Buy Rights Issue Shares?: Weighing the Opportunity
Whether you should participate in a rights issue of shares really depends on a number of factors, such as pricing, the number of shares being offered, and the use of proceeds.
But before we get to the heart of whether you should participate in a rights issue or not, we really need to dig into what a rights issue is.
What is a rights issue for shares?
A rights issue for shares is a corporate action where management tries to raise money by offering existing shareholders the right (but not the obligation) to purchase stock at a discounted price. Existing shareholders receive this right, and the right can sometimes be transferable, meaning that shareholders can sell the right or purchase more.
Existing shareholders are given the opportunity to buy a set number of new shares based on the number of shares they already own. Usually, this comes in the form of a ratio, such as the right to buy 0.25 of a share for every share you own. The opportunity to purchase new shares at a discounted price is a key feature of this special situation and, as I’ll walk you through below, provides some significant profit potential.
Since the company is selling shares as a way for the company to raise cash, at the end of the process, there will be more shares outstanding, and you’ll own less of the company if you don’t participate.
A rights offer can actually be an offer of new shares or other securities made to existing shareholders, and does not have to be common stock. But, for the purpose of this article, we’ll focus on share rights issuance.
What is the point of a rights issue?
The point of a right issue really comes down to raising capital for the business – a company can offer shareholders the right to purchase shares (the rights stock) in the hopes that enough shareholders will take the company up on the offer that the company can gain the capital that it wants for whatever project it hopes to pursue.
By offering a rights issue to existing shareholders rather than looking for funding elsewhere by offering shares to a 3rd party at a discounted price, management also treats existing shareholders more fairly.
Now that we have that out of the way, let’s move on to whether you should participate or not.
Is it good to buy right issue shares?
Yes, it can be good to participate in a rights issue of shares, but it depends on the specifics of the stock rights offer. Rights issues can be a lucrative special situation opportunity that many special situations or event driven investors overlook. The opportunity is not as obvious as in an M&A deal or special dividend.
Let’s walk through some of the reasons it would be good to buy a rights offering:
A. You can get the shares at a deep discount.
Let’s face it – everyone loves a bargain, and buying at a bargain price is often the best way to make money in the stock market.
In the case of a rights offer, companies entice investment with an offering of rights to the existing shareholders of a company at a discount to the pre-announcement price. If the discount is large enough, it’s probably worth purchasing shares because the stock price may rise back to around the pre-announcement price after the event takes place.
Of course, you’ll have to factor in the number of new shares when estimating how high the stock could climb after the shares are distributed.
B. Management will use the issuance to retire burdensome debt.
If management is stuck with high interest debt that is loading down its balance sheet, and keeping earnings from appearing on the income statement, then raising new capital can allow management to retire debt and show a more healthy level of profitability. If the stock is already depressed because of the debt load, then the firm could see a large rebound once the debt is repaid and earnings surge.
C. The capital raise will help the company unlock value.
Sometimes a company is sitting on significant unrealized value but needs capital to realize that value in the marketplace. Take Oroco Resource Corp, for example, which is sitting on a gold mine (ok, it’s copper) in terms of resources in the ground. Raising capital via a stock rights offer would allow the company to move through the process of solidifying the resource estimates and selling the property to a major mining firm. In this case, participating in a rights offer would both help the company unlock its value and give you a bigger stake in the profits when it does.
D. The capital raise will help the company to profitably grow its business.
Growth machines often need more capital than can be provided by operations. Growth consumes cash, after all. So, when a growth company with a good track record tries to raise funds to do more of what it’s good at through a rights offer, then purchasing shares can be a good move because you may reasonably expect the firm to keep growing in the future, and your holding to increase in value. Even better, your profit would be larger if the company offers shares at a discount to the prevailing market price.
E. You are a big shareholder and want to maintain your voting interest.
If you’re a big fish in the market, then you probably command some influence over management in the companies that you’re invested in. If a firm decides to do a rights offer, you will need to purchase a number of shares in proportion with your holding to maintain your percentage ownership in the business.
What happens if I don’t take up a rights issue?
If you don’t take up a rights offer, then you simply don’t get additional shares at a lower price, and you will also own less of the company on a percentage basis.
Remember that in a rights offering, the number of outstanding shares increases, so if you keep your share holding constant, your ownership stake in the company drops.
In addition, the per share value of the stock could decline, so if you bought with a 50% margin of safety, you could see that erode to 40% or 25%, depending on the number of shares sold.
How to Buy Rights Issue Shares: Your Step-by-Step Guide
Taking part in a rights offering is dead simple. You can simply do so through your broker.
How should I apply for a rights issue?
After the announcement, the company will grant you a dividend of subscription rights, and you should see those subscription rights listed among the stocks in your account.
It may take some time for the rights to be issued and be shown in your account. Watch for a press release from the company that informs shareholders of when the subscription rights have been issued.
Once they are issued, navigate to your broker’s corporate action section, or contact customer service if they don’t have that section. Your broker, such as Interactive Brokers, will give you the option to purchase shares in the company through this portal.
Record the number of shares you want to purchase. Your broker may state the number of shares that you are able to purchase. You usually check a box and write the number you would like to purchase in the portal, and click confirm. Honestly, it’s pretty simple.
Once done, and the offer period expires, the new shares should show up in your account, and your account will be debited the purchase amount. Congrats, you just participated in your first rights offering!
Can I apply for a rights issue from any bank?
No, you need a brokerage account to take advantage of a rights issue, since a right issue of shares is a corporate action available to stock (or bond) investors.
How to buy rights online?
There’s a secret tactic that some investors exploit when it comes to rights offerings – purchasing them. To purchase rights offerings online, you simply navigate to your broker’s trading window and type in the code for the rights that you would like to purchase. Simple as that.
Ok, for those not in the know, here’s the necessary background: Not only can you exercise the rights that the company sends you, sometimes those rights will be transferable. That means that you can actually purchase the subscription rights in the market and exercise it just like your other subscription rights. Sometimes this makes sense when you can pick up those rights at a bargain, but – like options – they will be priced accordingly, so you need to do some calculations to see if it makes sense to purchase the rights AND then the stock at the offer price.
Can I sell right issue shares without buying?
Good question. Yes, you can sell your subscription rights if those rights are transferable. The company will state whether the subscription rights are transferable or not in the announcement, so read it carefully. If they don’t mention it, the rights are probably transferable. If they say that the rights are not transferable, then you can’t sell them.
To sell them, simply navigate to your broker’s trading window and punch in the code for the subscription rights just like you would sell a stock. Easy.
What happens if I forgot to apply for a rights issue?
If you forget to apply for a rights issue, you simply miss out on the chance to purchase shares at a discounted price. As with all other rights issues that you do not participate in, you will own a smaller percentage of the company since the number of outstanding shares has increased, but the number of shares you own hasn’t.
Rights Issue Examples: Real-World Moves That Made Headlines
Now to the good stuff. Rights offerings aren’t exactly rare, and it’s arguably easier to make money from them than it is from spin off stocks. You just have to know what to look for.
I’m going to walk you through a number of rights offerings below to highlight various scenarios and how investors could have profited. Ready?
Rafael Holdings rights offering to fund drug development
Rafael Holdings is a holding company or investment company operating in the pharma space, led by a gifted entrepreneur and VC named Howard Jonas.
On April 30th, 2025, Rafael announced that they were going to raise $25 million via a rights offer that would be backstopped by Chairman Howard Jonas. Shareholders would get a chance to purchase 0.526 of a share for each share owned at a price equal to $1.28 per share.
This offer would be made to shareholders on record as of May 9th, 2025, and the offer window would run from the 13th to the 29th of May.
At the time of the announcement, shares were trading for $1.66 per share, so the pricing came in at a 23% discount. Not bad.
The offer number was later revised to 0.603 for each share owned, and Howard Jonas would purchase any rights not exercised to ensure the company was adequately funded.
Shares immediately traded down to the offer price after the, then rallied to $3.05 a week after the rights offer concluded. Investors who participated, or purchased shares at the offer price, saw a 138% capital gain on that investment in a week. As of the time of writing this, the shares are still climbing, so the eventual capital gain may be meaningfully higher.
As it turned out, shareholders only contributed $4 million of the $25 million the company sought, so Howard Jonas purchased $21 million worth of stock, a substantial vote of confidence in the company’s future.
Where was the opportunity?
Rafael’s liquidation value was about $2.50 per share, and shares were being offered at a large discount to fair value, roughly a 50% discount. Even with the added shares sold at that discount, anyone who purchased shares at $1.28 was purchasing stock at a massive discount to liquidation value and would likely see the stock rebound. Remember that stocks typically trade down to the offering price, then rebound.
The firm was also raising cash to fund the development of a new drug. The odds of that drug achieving marketing approval was about 70%, so the company was using these funds to likely unlock significant though uncertain value for shareholders.
Teck Resources uses rights offering to retire debt
Teck Resources, a Canadian mining company, conducted a rights offering in 2009 to raise capital and reduce debt incurred from its 2008 acquisition of Fording Canadian Coal Trust.
The company was not in bankruptcy and was financially stable, though it faced pressure from a $9.8 billion debt load due to the acquisition and a downturn in commodity prices during the global financial crisis. The rights offering was used to deleverage its balance sheet without resorting to bankruptcy.
Teck offered existing shareholders the right to purchase additional Class B subordinate voting shares at CAD $7.60 per share, a significant discount to the market price of approximately CAD $15–$20 per share at the time.
The rights offering was announced on January 19th, 2009. Shareholders received subscription rights on January 27th, 2009, and the window to exercise these rights ran until February 17th, 2009.
Teck raised approximately CAD $1.7 billion (USD $1.4 billion) through the rights offering. The proceeds were used to retire a portion of its burdensome acquisition-related debt, specifically paying down a term loan and reducing overall leverage, which lowered interest expenses and improved financial flexibility.
Following the rights offering and debt reduction, Teck’s Class B stock price saw a significant increase. In early February 2009, before the offering closed, the stock was trading around CAD $15 per share. By mid-2009, the stock price climbed to approximately CAD $25–$30 per share, reflecting a roughly 60–100% increase.
Naspers Limited used a rights offering to help unlock the value of its portfolio
Naspers Limited, a South African multinational internet and media group listed on the Johannesburg Stock Exchange (JSE), conducted a traditional rights offering in 2019 to unlock hidden value by funding the expansion of its e-commerce and technology investments, particularly in its portfolio of high-growth tech companies like Tencent and Takealot.
Naspers’ share price suffered from a conglomerate discount, as the market undervalued its significant stake in Tencent (a Chinese tech giant) and other e-commerce assets due to the complexity of its holdings and limited transparency about their growth potential. The rights offering provided capital to scale these businesses, particularly in emerging markets, making their value more visible to investors.
Naspers offered new ordinary shares at ZAR 2,400 per share, a discount of approximately 15% to the prevailing market price of around ZAR 2,800–3,000 per share on the JSE. This wasn’t much of a discount, though smart investors would have still smelled opportunity.
The rights offering was announced on September 11th, 2019, and the subscription period for shareholders to exercise their rights opened on September 23rd, 2019, and closed on October 4th, 2019. Shareholders received 1 right for every 10 shares held, allowing them to purchase new shares at the discounted price.
Naspers raised approximately ZAR 14.6 billion (USD ~$1 billion). The proceeds were used to accelerate investments in its e-commerce and technology portfolio, including expanding operations in subsidiaries like Takealot (South Africa’s leading online retailer) and increasing stakes in other global tech ventures.
By investing in high-growth areas like online retail and fintech, Naspers demonstrated the profitability and scalability of its portfolio, addressing the market’s underappreciation of these assets.
Before the rights offering announcement in September 2019, Naspers’ shares traded around ZAR 2,800–3,000. After the offering and subsequent announcements of strategic investments, the stock price rose to ZAR 3,600–3,800 by early 2020, a 25–30% increase. This increase was driven by improved investor confidence in Naspers’ ability to monetize its tech portfolio, particularly through growth in e-commerce, and the market’s recognition of the enhanced value of its assets. The discounted offer price also encouraged strong shareholder participation, supporting the stock’s upward momentum.
What are the two types of right issues?
The two main types of rights issues (also known as rights offerings) are:
- Renounceable Rights Issue: In this type, shareholders receive rights to purchase additional shares at a discounted price, and these rights are transferable. Shareholders can either exercise the rights to buy the new shares or sell the rights to other investors on the open market. This allows shareholders who do not wish to participate to realize value from their rights.
- Non-Renounceable Rights Issue: In this type, shareholders also receive rights to purchase additional shares at a discounted price, but the rights are not transferable. Shareholders must either exercise the rights to buy the shares or let them expire, typically with no ability to sell the rights to others. If shareholders do not participate, they face dilution of their ownership, and unexercised rights may be reallocated or lapse.
Note that some investors call these transferable and non-transferable subscription rights, but the meaning is the same.
Rights Issue Advantages and Disadvantages: The Pros and Cons
When we look at the pros and cons of a rights offer, we need to take into account both the company’s and the investor’s perspective. Ultimately, there’s an interplay between the two, and it’s worth going over the key considerations so you can make a better trading decision.
What are the benefits of a right issue?
Companies benefit because it’s an efficient way to raise funds without the high costs of public offerings, as shares are offered to existing shareholders at a discount. This preserves the ownership structure, minimizing dilution of control. Funds can be used for growth, acquisitions, or strengthening the balance sheet, enhancing financial stability, and signaling confidence to the market. A successful rights issue can boost investor perception, potentially increasing share value.
For shareholders, a rights issue allows maintaining proportional ownership by purchasing additional shares, avoiding dilution. The discounted price offers a cost-effective investment opportunity. In renounceable rights issues, shareholders can sell their rights, realizing value without further investment. Non-renounceable issues, while less flexible, still provide the chance to buy shares at a lower price. If the company uses funds effectively, such as for high-return projects, the share price may rise, benefiting shareholders.
Overall, rights issues align company and shareholder interests, fostering growth and value creation while offering flexibility and potential financial upside.
What are the disadvantages of a rights issue?
A rights issue, while beneficial for raising capital, has several disadvantages for companies and shareholders. For companies, a key drawback is the potential for share price dilution, as issuing new shares increases the total number outstanding, potentially lowering earnings per share and stock value if market confidence wanes.
The discounted offer price can also signal financial distress, eroding investor trust and causing a short-term share price drop. Rights issues require significant administrative effort and costs, including legal and regulatory compliance, which can strain resources. If the issue is undersubscribed, particularly in non-renounceable offerings, the company may fail to raise the needed funds.
For shareholders, a major disadvantage is dilution of ownership if they cannot afford to exercise their rights, reducing their proportional stake and influence. In non-renounceable rights issues, shareholders unable to participate lose value, as rights cannot be sold. The discounted price may attract short-term speculative trading, increasing volatility. Additionally, a poorly received rights issue can damage the company’s reputation, leading to prolonged share price weakness, impacting shareholder returns. These factors make rights issues a complex decision, balancing capital needs against market and shareholder risks.
Can a rights issue be made at a discount?
Yes, rights issues can and often are made at a discount to the pre-announcement market price. This entices shareholders to purchase additional shares.
Does The Rights Issue Discount Matter?
The discount in a rights issue significantly influences the potential to profit from this special situation, but its impact depends on whether rights are transferable, market dynamics, and investor strategy.
The rights issue discount, the gap between the market price and the lower offer price for new shares, creates opportunities for profit by allowing shareholders to buy shares at a bargain. For example, if a stock trades at $10 and new shares are offered at $7 (a 30% discount), the discount incentivizes participation and compensates for dilution, as new shares increase the total share count, reducing per-share value.
For existing shareholders, a larger discount increases the value of their subscription rights. If rights are transferable, shareholders can sell them in the market, capturing the discount’s value without additional investment. For instance, a right to buy a $7 share when the stock is $10 might trade at $2, yielding a profit.
If rights are non-transferable, shareholders must exercise them to benefit, buying shares at the discounted price. Profits materialize if the stock rebounds above the theoretical ex-rights price (TERP), a weighted average of the market and offer prices (e.g., $8.50 for a 1:4 rights issue). However, if the stock falls below the TERP due to negative sentiment or poor fundamentals, the discount may not lead to gains.
For non-shareholders, transferable rights enable arbitrage: buy rights, exercise them to acquire cheap shares, and sell at the market price. A larger discount widens the profit margin (e.g., buy a right for $1, exercise at $7, sell at $9 for a $1 profit). Non-transferable rights block this strategy, limiting profits to shareholders. Arbitrage often drives the share price toward the TERP, narrowing short-term profit windows.
Non-shareholders and shareholders alike can also buy stock at near the exercise price because stocks tend to fall toward the exercise price over the short term, and then rebound after the offer period ends. If the discount to the pre-announcement price is large, then investors can pick up cheaper shares and may have larger capital gains when the price rebounds.
Clearly, the discount’s size matters a lot. A 20-40% discount is common and enhances immediate value but may signal financial distress, increasing risk. Market sentiment, company fundamentals, and liquidity also affect outcomes. Positive use of proceeds (e.g., growth funding) can spur a rebound, boosting profits, while weak fundamentals may prolong price declines. Studies, like those in the Journal of Financial Economics, show prices often converge to the TERP due to arbitrage and dilution expectations.
To profit, investors must act quickly, especially with transferable rights, and consider transaction costs and risks. The discount drives short-term arbitrage and long-term potential, but success hinges on the company’s performance post-issue.
Does a rights issue reduce share prices?
Yes, share prices typically drop in the short term after a rights issue is announced. Rights issues typically offer new shares at a discount to the current market price, creating downward pressure on the share price as the market adjusts to the lower theoretical ex-rights price (TERP), which blends the pre-issue price with the discounted offer price.
The rights offer also takes an existing source of demand off the market – existing shareholders adding to their position. When a rights offer is announced, existing shareholders know that they can purchase shares at a discounted price rather than simply go into the market and buy at a higher market price.
The rights themselves (the option to buy shares at the offer price) are often traded separately. If the share price remains significantly above the offer price, arbitrageurs can buy rights, exercise them to acquire shares at the lower offer price, and sell the shares in the market for a profit. This selling pressure drives the share price down toward the offer price until the arbitrage opportunity diminishes.
Existing shareholders with sufficient capital could also exercise their rights to buy additional shares at the discounted offer price and then sell their existing shares (not the newly issued ones, if restricted) in the market if the price remains above the offer price. However, this is less common and depends on the shareholder’s ability to sell without triggering lock-up periods or other restrictions. In these scenarios, an investor may be able to lower their effective cost basis.
Share Rights Issue: Key Takeaways
It’s pretty clear that rights offerings are a great way to make money. They’re perfect for traders, who just like to look at scribbles on their computer screens, or value investors, who look at the TERP to judge how cheap shares are. So long as the discount to the pre-offer price is cheap, and the value of the company is pretty stable, value investors should look closely at these deals to make some quick money.
The question is where to find newly announced subscription rights. Typically, investors come across these haphazardly, on news sites or social media. But, that means you’re not aware of the best rights issue stocks, so you ultimately miss them.
Going out to look for them also takes time and effort, so it’s not a viable approach, unless you’re a professional running a fund (even then, shouldn’t you be doing analysis?).
That’s why I put together Event Driven Daily Morning Brew, which sends free subscribers a comprehensive email listing each and every special situation we find over the course of the month. Subscribe now by entering your email in the box below because we will save you hours of work each month… and it’s absolutely free.
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