What it means
When a company needs fresh equity, it often turns first to its own shareholders. A rights issue gives them tradable rights they can sell in the market, while an open offer gives them a similar invitation but no tradable entitlement.
That single difference drives everything else. In an open offer, a shareholder who declines the offer cannot sell the invitation, so the choice is simply to subscribe or to watch their ownership percentage shrink.
Open offers are common in the United Kingdom and some other markets, where listing rules such as the FCA's UKLR framework set out how further issuances to existing holders must be structured and documented. Companies often pair an open offer with a placing to institutions, and may include an excess application facility that lets participating shareholders ask for more shares than their basic entitlement if other holders pass.
The offer price is normally set below the market price to encourage take-up, and the offer stays open for a fixed period with a published timetable. Shareholders must send payment by the deadline or the opportunity lapses.
Compared with a rights issue, an open offer is cheaper and faster to run because there is no nil-paid trading period to arrange. The trade-off lands on non-participating shareholders, who receive no compensation for the dilution they suffer.
For a small investor, the key questions are always the same: why does the company need the money, how deep is the discount, and can I afford my entitlement? Ignoring the letter entirely is itself a decision to be diluted.
From the company's side, an open offer also sends a signal. Management is saying that current owners deserve the first chance to fund the next chapter, which tends to play better with the shareholder base than a pure institutional placement.
In practice
Real-world examples.
Example
A listed retailer funds a warehouse expansion with a 1 for 8 open offer at a 15% discount, giving loyal shareholders the first chance to increase their holdings cheaply. A holder of 800 shares can buy up to 100 new shares. The company avoids the cost of arranging tradable rights.
Example
A shareholder who strongly believes in the company subscribes in full and uses the excess application facility, ending with more than the basic entitlement because take-up elsewhere was low. The excess facility is allocated pro rata among applicants, so large excess requests are usually scaled back when demand is strong.
Example
An investor compares an open offer with a recent rights issue by another company and notes that the rights issue holder who declined could at least sell the rights, while the open offer holder who declined received nothing. The investor concludes that ignoring an open offer circular has a real cost.
Formula
Calculation
Pro-rata entitlement = existing shares held x (new shares offered / existing shares). For example, a 1 for 5 open offer lets a holder of 1,000 shares buy up to 200 new shares at the offer price.
Worked example. A fictional company has 50,000,000 shares in issue, trading at $3.00, and offers 1 for 5 at $2.40 (a 20% discount). That is 10,000,000 new shares and $24,000,000 raised. A holder of 1,000,000 shares (2.0%) can buy up to 200,000 new shares for 200,000 x $2.40 = $480,000. If the holder subscribes, the stake becomes 1,200,000 / 60,000,000 = 2.0%. If the holder does nothing, the stake falls to 1,000,000 / 60,000,000 = about 1.67%. The theoretical ex-offer price is (5 x $3.00 + 1 x $2.40) / 6 = $17.40 / 6 = $2.90.Case study
Seen in the real world.
This case study is fictional and illustrative. Hartwell Components, a made-up UK-listed engineering firm, needs $40 million to buy a rival. It announces a 1 for 6 open offer at $2.40 per share, a 20% discount to the $3.00 market price, alongside a small institutional placing. An individual shareholder with 3,000 shares can buy up to 500 more for $1,200. She takes up her full entitlement and also applies for 200 excess shares, of which she receives 90 because other holders left room.
A colleague who ignored the circular saw his stake diluted by roughly 14% with no compensation, since the offer carried no tradable rights to sell. After the offer closes, the share price settles close to the theoretical ex-offer price of about $2.91. Hartwell's board notes that the offer was cheaper to run than a rights issue, but also that non-participating holders bore the cost of dilution. The company and figures are invented for illustration.
Watch out
Common mistakes.
- Binning the offer circular unread; the deadline passes and the discount opportunity is lost while dilution happens anyway.
- Assuming an open offer works like a rights issue and waiting for tradable rights to appear in the account, which never happens.
- Subscribing without asking why the company needs cash, because some open offers fund rescue deals that remain risky even at a discount.
Questions
People also ask.
How is an open offer different from a rights issue?
Both invite existing shareholders to buy discounted new shares, but a rights issue creates tradable rights you can sell, while an open offer entitlement cannot be sold or transferred.
What happens if I do nothing?
Your percentage ownership falls because new shares are issued to others, and you receive no cash or rights in compensation for that dilution.
Why would a company choose an open offer?
It is simpler and cheaper to run than a rights issue since there is no nil-paid trading period, and it still gives existing shareholders preferential access to the new shares.
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