What Is an Open Offer and How Does It Compare to a Rights Issue?

Companies sometimes need to raise additional capital, and one way they do this is through an open offer. This method allows existing shareholders to purchase new shares directly from the company, typically at a discount. It provides a way for businesses to secure funds without involving public investors but also affects shareholder dilution and control.

To understand how an open offer works and how it compares to other fundraising methods like a rights issue, it’s important to examine its structure, motivations, and regulatory requirements.

Structure and Mechanics

An open offer follows a structured process to ensure transparency and compliance with financial regulations. Companies establish terms regarding shareholder participation, pricing, and the timeline for investors to respond, helping shareholders assess the benefits and risks of subscribing to new shares.

Subscription Terms

Existing shareholders are the only participants in an open offer, but unlike a rights issue, the new shares are not transferable. Shareholders cannot sell their entitlement, limiting flexibility. The company sets a subscription ratio, such as one new share for every five held. If a shareholder declines to participate, their ownership percentage decreases as new shares are issued.

Some open offers include an oversubscription option, allowing shareholders to apply for additional shares if others choose not to participate. However, the company is not required to fulfill these extra requests, making it a discretionary feature rather than a guaranteed right.

Pricing Method

Companies typically offer shares at a discount to the market price to encourage participation. The discount is based on recent trading prices, market conditions, and historical volatility. For example, if a stock trades at $10 per share, an open offer might price new shares at $8, representing a 20% discount. A larger discount can attract more investors but may also signal financial struggles.

Unlike a rights issue, which involves a theoretical ex-rights price (TERP) to assess post-issuance dilution, an open offer does not require such calculations since no tradable rights are issued. Regulatory guidelines, such as the UK Listing Rules, ensure fairness and adequate disclosure in pricing.

Offer Timeline

The duration of an open offer typically lasts one to three weeks. In the UK, the Financial Conduct Authority (FCA) mandates that an offer document be available for a minimum period, ensuring investors have time to review the terms.

The process begins with an announcement, followed by offer documents detailing the terms, rationale, and financial implications. Shareholders must respond within the stated period, after which the company allocates shares and finalizes the issuance. If the offer is under-subscribed, the company may reduce the amount of capital raised or seek alternative funding sources.

Issuer Motivations

Companies use open offers to raise capital while maintaining control over shareholder composition. Unlike public offerings, which introduce new investors, an open offer allows existing shareholders to increase their stakes, reinforcing ownership stability. This is particularly useful for firms with concentrated ownership, where major shareholders want to prevent dilution of their voting power.

Financial strategy and market conditions influence the decision to use an open offer. Companies facing short-term liquidity constraints may prefer this method over debt issuance, which could increase leverage ratios and affect credit ratings. In industries like banking, where regulatory capital requirements under Basel III dictate minimum capital adequacy levels, equity fundraising through an open offer helps meet compliance standards while preserving financial flexibility.

Investor sentiment also plays a role. A well-structured open offer with a reasonable discount can signal confidence in the company’s future, encouraging participation. However, if investors perceive the offer as a sign of financial distress, it may negatively impact stock performance. Companies must balance pricing and communication strategies to ensure a positive reception.

Comparison With a Rights Issue

Both open offers and rights issues allow companies to raise equity capital from existing shareholders, but they differ in flexibility and investor participation.

A key distinction is that in a rights issue, shareholders can sell their rights on the open market if they choose not to subscribe, allowing them to recover some value. In contrast, an open offer does not permit such transfers, meaning non-participating shareholders absorb the full impact of dilution without compensation.

Underwriting is another difference. Rights issues are often underwritten by investment banks or institutional investors, ensuring the company raises the intended capital even if shareholders do not fully subscribe. However, underwriting fees typically range from 2% to 5% of the funds raised. Open offers are less commonly underwritten since they do not involve tradable rights, reducing transaction costs but increasing the risk of an undersubscribed offering.

From an accounting perspective, both methods follow similar equity issuance principles under IFRS and US GAAP. However, the impact on earnings per share (EPS) calculations differs. In a rights issue, the theoretical ex-rights price (TERP) is used to assess post-issuance dilution, influencing adjusted EPS figures in financial statements. Open offers do not involve tradable rights, so EPS adjustments are based purely on the increase in outstanding shares. This distinction can affect investor perception, particularly for companies concerned about how EPS dilution appears in financial reports.

Regulatory Filings

Companies conducting an open offer must comply with financial regulations to ensure transparency and investor protection. In the UK, filings with the Financial Conduct Authority (FCA) and the London Stock Exchange (LSE) require a prospectus or shareholder circular outlining the terms, financial impact, and rationale behind the offering. The UK Prospectus Regulation provides exemptions for smaller offers below €8 million, reducing the burden for smaller issuances.

In the U.S., while open offers are less common, similar fundraising activities typically require a Form S-3 or S-1 registration statement with the Securities and Exchange Commission (SEC), depending on whether the issuer qualifies for simplified reporting.

Stock exchange listing rules impose additional requirements. The LSE’s Listing Rules mandate that issuers exceeding a 10% capital increase via an open offer must obtain shareholder approval. In Hong Kong, the Stock Exchange requires issuers to maintain a minimum public float of 25%, meaning an open offer that consolidates ownership among large shareholders could trigger compliance concerns. These safeguards prevent excessive dilution and ensure fair treatment of minority investors.