Legal Definitions - subscription privilege

A subscription privilege, also known as a preemptive right, is a legal entitlement granted to existing shareholders of a company. It provides them with the first opportunity to purchase newly issued shares of the company's stock before those shares are offered to the general public or new investors.

The primary purpose of this privilege is to allow current shareholders to maintain their existing percentage of ownership and control in the company, thereby preventing their stake from being diluted by the issuance of additional shares.

• Example 1: Small Business Expansion

  Imagine "Local Brews Inc.," a small, privately owned craft brewery with 1,000 shares outstanding. Sarah owns 100 of these shares, giving her a 10% ownership stake. The company decides to issue 500 new shares to fund the purchase of new brewing equipment. Because Sarah has a subscription privilege, she would be offered the right to purchase up to 50 of these new shares (10% of 500 new shares) before they are offered to any new investors. If she exercises this right, she maintains her 10% ownership (150 shares out of 1,500 total shares), preserving her influence in the company.

• Example 2: Public Company Rights Offering

  "Tech Innovations Corp," a publicly traded company, needs to raise a significant amount of capital for a new product line. Instead of simply selling new shares on the open market, the company conducts a "rights offering" to its existing shareholders. Each shareholder receives a certain number of "rights" based on their current holdings. These rights allow them to subscribe to (purchase) new shares at a specified price, often at a discount to the current market price, for a limited period. This is an exercise of their subscription privilege, giving them the first chance to buy new stock and avoid dilution before the shares are potentially offered to other investors.

• Example 3: Startup Funding Rounds

  "HealthLink Solutions," a promising tech startup, has completed its initial seed funding round, and its early angel investors collectively hold 30% of the company. As the company grows, it needs more capital and decides to undertake a Series A funding round, issuing a substantial number of new shares to new venture capital firms. If the early angel investors have a subscription privilege, they would be offered the opportunity to purchase a proportional number of these new Series A shares first. This allows them to either maintain their percentage ownership in the company by investing more or choose not to invest further, accepting that their ownership percentage will decrease as new investors come in.