An Initial Rights Offering (IRO) is a method of raising capital where a company offers its existing shareholders the first opportunity to purchase additional shares at a predetermined price, before these shares are made available to the public. The offering is usually made on a pro-rata basis, meaning that for every set number of shares a shareholder currently owns, they are given the opportunity to purchase a certain number of additional shares.

This method serves to protect current shareholders from the dilution of their ownership stake that often occurs during a traditional Initial Public Offering (IPO). It can also be a more cost-effective means for a company to raise capital, as the process can involve lower underwriting fees and reduces the marketing and distribution efforts typically required in an IPO.

However, if existing shareholders choose not to exercise their rights to purchase the additional shares, they risk dilution of their ownership stake. Also, an undersubscribed rights offering could potentially signal a lack of confidence in the company’s future prospects, which could impact the company negatively in the public phase of the offering.