Rights, warrants and American Depositary Receipts

Three different connections to equity

Rights and warrants let their holders purchase shares under specified terms. American Depositary Receipts, or ADRs, represent an interest in foreign shares. Rights and warrants to purchase equity are included in the definition of equity security under 15 U.S.C. § 78c(a)(11) and 17 C.F.R. § 240.3a11-1. Holding a purchase privilege is different from already owning the underlying shares.

Rights: short-term subscription privileges

A rights offering gives existing shareholders a short-term opportunity to subscribe for newly issued shares, typically at a subscription price below the current market price. Pre-emptive rights allow shareholders to maintain their proportionate ownership when additional shares are issued. A shareholder must participate in the required proportion to preserve that percentage. Selling transferable rights can produce cash but does not preserve the ownership percentage. Rights can be exercised, sold if transferable, or allowed to expire.

Warrants: a longer purchase window

A warrant gives its holder the right, without an obligation, to purchase shares at a specified exercise price during a stated period. Warrants generally last years, while subscription rights generally last weeks. A warrant's exercise price is typically above the stock's market price when the warrant is issued. Warrants may accompany bonds or preferred stock as an inducement and may be detachable. Actual terms govern transferability and exercise. Exercising warrants ordinarily supplies cash to the issuer and creates additional shares, potentially diluting existing shareholders. A warrant can expire worthless. Its holder does not receive common-stock dividends or voting privileges merely by holding the warrant.

ADRs: foreign shares through a U.S. depositary

An ADR is a U.S. dollar-denominated receipt issued by a U.S. depositary bank representing foreign company shares held in custody for the program, commonly through a custodian in the foreign market. One receipt may represent one share, multiple shares, or a fraction of a share. ADRs facilitate U.S. trading in foreign equity; they are not promises to purchase shares later. Dividends are generally converted into dollars for distribution, subject to applicable foreign withholding and depositary fees.

Dollar trading does not eliminate currency risk. If the foreign currency weakens against the dollar, the dollar value of unchanged foreign-currency share prices or dividends falls, all else equal. ADRs also retain the underlying company's business and market risks and exposure to foreign political developments. Remember the distinction: rights preserve an opportunity to maintain ownership, warrants provide a longer purchase privilege, and ADRs represent foreign equity already held in custody.