The Zenabis Global Inc. (TSX: ZENA) “Rights Offering”, which expired this past Wednesday November 27, 2019, was over-subscribed and will result in the issuance of the maximum of 139,086,624 common shares of the Company at a price of $0.15 per Common Share for gross proceeds of approximately $20.8 million. This article outlines what a Rights Offering is, how it is structured, how it is executed and how it differs from the more common, albeit still rare, warrants.
Written by Lorimer Wilson, editor of munKNEE.com – Your KEY To Making Money!
Rights and warrants are usually issued by a company as a method of raising capital, mainly the equity capital. They are both quick and cost-effective but there are major differences between the two.
A Right is a privilege granted to a shareholder to acquire a pro rata portion of additional shares of the issuer’s stock directly from the issuing company at a specific price per share which is typically set at a discount to the recent trading price of the issuer’s stock. They are usually short-term 4 to 6 week long offerings.
Why Are Rights Offered?
Companies choose to raise additional capital through a Rights Offering for the following reasons:
- Existing shareholders may be more inclined than the public at large to buy shares in the company.
- The company may want to give existing shareholders the opportunity to acquire additional shares.
- A Right Offering allows existing shareholders to maintain their proportionate interest in the company and, as such, there is no dilutive effect to shareholders who exercise the Rights issued to them.
Transferable vs. Non-transferable Rights
- Most Rights Offerings are non‐transferable so if a shareholder decides not to exercise the opportunity to acquire additional shares at the discounted within the allocated time period then the shareholder’s current ownership in the issuer will be diluted by those shareholders who exercise their rights.
- Some Rights Offerings, however, are structured by an issuer to permit rights to be transferable and in such instances those shareholders who choose not to exercise their transferable rights can trade them in the secondary market during the offering period. The money earned from trading the Rights enables the shareholders to offset dilution by earning a profit trading the Rights.
Rights Offerings should not be confused with Warrants. For the record, a warrant is a security giving any holder the right, but not the obligation, to acquire the underlying security at a predetermined (i.e. exercise) price and for a specified period of time (i.e. term or duration) as a way of raising funds, and it is often included as an incentive extra to share issue. Warrants have expiration dates ranging from 1 to 7 years and the longer the duration the less risk is involved. (Read my exclusive TalkMarkets article for a greater insight into warrants.)
Rights and Warrants trade on the exchange where the issuer’s common stock is listed, or over the counter if the issuer’s stock is not listed on an exchange. They can produce large gains if the stock price goes up by even a small amount but they can also be risky because they are a type of leverage.
A Current Example of a Rights Offering
Zenabis Global’s made a Rights Offering to holders of its common shares of record at the close of business on October 31, 2019, with the objective of raising up to $20.6M after deducting expense and, as mentioned in the introduction, the offering achieved its objectives. Almost nothing has been written about Rights Offerings so I have taken the liberty of presenting the details of the Zenabis offering here so you will have a full understanding as to what is involved in the offering of such a financial derivative.
The market reaction to Zenabis Global’s offering was particularly harsh with the stock declining 77% during the 4-week offering period before jumping 36% the day after its conclusion as can be seen in the chart below: