Ensuring Success of a Rights Offering

A

Sure, I'd be happy to help!

A rights offering is a way for a company to raise capital by issuing new shares of stock to its existing shareholders. In a rights offering, the company gives its current shareholders the right to purchase a certain number of new shares at a discounted price.

However, there is no guarantee that all shareholders will take advantage of this opportunity and purchase the new shares. In order to ensure the success of the rights offering and raise the desired amount of capital, the company can make use of various mechanisms, including the following:

A. Standby arrangement: A standby arrangement is an agreement between the company and a third party (usually an investment bank) in which the third party agrees to purchase any shares that are not bought by the existing shareholders. The third party may also agree to purchase additional shares if the demand from existing shareholders exceeds the number of shares being offered. The standby arrangement effectively acts as a guarantee that the company will raise the desired amount of capital, regardless of whether or not all existing shareholders participate in the rights offering.

B. Oversubscription privilege: An oversubscription privilege allows existing shareholders to purchase additional shares in the rights offering if there are any shares left over after all shareholders have exercised their initial rights. This can be a way for the company to raise additional capital beyond what was initially planned.

C. Green shoe provision: A green shoe provision allows the underwriters (the investment banks handling the rights offering) to sell additional shares of stock if demand from investors is higher than anticipated. This can be a way for the company to raise more capital than originally planned.

D. Shelf registration: A shelf registration is a type of registration statement that allows a company to register a large amount of securities with the SEC and then sell those securities over a period of time. This can be a way for the company to raise capital more quickly and easily than through a traditional rights offering.

Out of these options, the mechanism that would ensure the complete success of a rights offering would be a standby arrangement (option A). By having a third party agree to purchase any shares that are not bought by existing shareholders, the company can be certain that it will raise the desired amount of capital, regardless of how many existing shareholders choose to participate in the rights offering.