A company can ensure the complete success of a rights offering by making use of a
- standby arrangement.
- oversubscription privilege.
- green shoe provision.
- shelf registration.
Answer: a. standby arrangement.
Answer Explanation
A standby arrangement, also known as a standby underwriting agreement, allows a company to ensure the success of a rights offering.
A standby arrangement is a commitment by an underwriter or a group of underwriters to purchase any unsold shares in a rights offering. This means the underwriter will purchase any remaining shares that existing shareholders did not subscribe to during the rights offering. Even if existing shareholders do not respond as strongly as anticipated, this commitment ensures that the company raises the capital it needs.
In a rights offering, a company offers new shares to its existing shareholders proportionate to their current holdings. There may be unsold shares if some shareholders choose not to exercise their rights or if the overall response is weaker than expected. Underwriter(s) fulfill their commitment under the standby arrangement by purchasing the remaining shares at the subscription price in such cases.
The standby arrangement instills confidence in investors that the company’s capital-raising goals will be achieved, and it reduces the risk for existing shareholders who participate in the offering. Shareholders may be more inclined to subscribe to a rights offering if they know that any unsold shares will be purchased.
Why the other options are not correct
b. Oversubscription privilege:
Existing shareholders may request additional shares in a rights offering beyond their proportional allocations with the oversubscription privilege, also known as “subscription in excess.” If not all shareholders exercise their rights, some shares remain available for additional subscription, then this privilege applies.
The oversubscription privilege can lead to increased participation in the rights offering, but it doesn’t ensure the success of the offering since it doesn’t address the issue of unsold shares.
c. Green shoe provision:
The green shoe provision, or over-allotment option, is typically used in IPOs. It allows underwriters to sell more shares than the company originally offered. Underwriters can exercise the green shoe option if demand for the IPO is high to purchase additional shares from the company at the offering price, and then sell those additional shares to meet the excess demand. In the context of a rights offering, the green shoe provision does not address the issue of unsold shares.
d. Shelf registration:
A company can register its securities in advance with the Securities and Exchange Commission (SEC) without immediately selling them to the public by using shelf registration. When the company registers its securities, it can issue and sell them when the market conditions are favorable at a later date. As shelf registration streamlines the offering process, it does not guarantee the success of a rights offering, since it does not address the issue of unsold shares or provide a commitment to purchase any remaining shares.
Conclusion
The use of a standby arrangement, also called a standby underwriting agreement, can ensure the complete success of a rights offering. A standby arrangement entails an underwriter or a group of underwriters providing a safety net for the company to raise the capital it seeks by purchasing any unsold shares in the rights offering.
The other options (b) Oversubscription privilege, (c) Green shoe provision, and (d) Shelf registration are not correct because they do not provide the same level of assurance for the success of the rights offering. For companies and investors involved in capital-raising activities, it is essential to understand the various aspects of rights offerings and underwriting methods.
A best efforts offering is sometimes used in connection with a ______ of new, long-term securities.
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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