Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What is a key characteristic of a subscription right?

1. It allows for direct investment in real estate

2. It typically involves purchasing shares at a premium

3. It is usually granted in conjunction with an offering

4. It provides rights to fixed dividends

The correct answer is: It is usually granted in conjunction with an offering

A key characteristic of a subscription right is that it is usually granted in conjunction with an offering. Subscription rights, also known as preemptive rights, enable existing shareholders to purchase additional shares of the company's stock before the new shares are offered to the public. This mechanism ensures that current shareholders can maintain their proportional ownership in the company and avoid dilution of their equity stake. In the context of corporate finance, subscription rights are often part of a capital raise process, where a company seeks to issue new shares to raise funds for various purposes, such as expansion, debt repayment, or other operational needs. By providing these rights to existing shareholders, companies can incentivize them to participate in the new offering, thereby potentially improving the success of the capital raise. This characteristic distinguishes subscription rights from other financial instruments or investments that do not inherently involve the direct offering of shares to existing shareholders or do not provide them with the opportunity to maintain their ownership percentage in the company during new issuances.