Equity Securities — Quick Reference

Core Concepts at a Glance

• Common stockholders are last in liquidation but have unlimited upside

• Preferred stockholders have priority over common for dividends and liquidation, but typically no voting rights

• Rights offerings allow existing shareholders to maintain their ownership percentage

• Warrants are long-term instruments (often 5–10 years) issued as sweeteners with bonds or preferred stock

• ADR levels determine how much a foreign company can raise from U.S. investors

---

Common Stock Rights

|---|---|

---

Preferred Stock Types

|---|---|

---

Rights vs. Warrants Comparison

|---|---|---|

---

ADR Levels

|---|---|---|---|

Right	Description
Voting	One vote per share (statutory or cumulative voting)
Dividends	Declared by board; no guarantee of payment
Preemptive	Right to maintain proportional ownership in new issuances
Residual	Last claim on assets after all creditors and preferred holders
Inspection	Right to inspect corporate books (annual report, etc.)
Transferability	Freely buy/sell shares on the open market
Type	Key Feature
Cumulative	Missed dividends accrue as "dividends in arrears" — must be paid before common dividends
Non-Cumulative	Missed dividends are gone forever; do NOT accrue
Convertible	Can be exchanged for a fixed number of common shares
Callable	Issuer can redeem at a set price (call price) after a specified date
Participating	After receiving stated dividend, shares in extra dividends with common stockholders
Adjustable-Rate	Dividend rate resets periodically based on benchmark rate
Feature	Rights	Warrants
Purpose	Allow existing shareholders to buy new shares before public	Issued as sweetener with bonds or preferred
Expiration	Short-term: typically 30–60 days	Long-term: often 5–10 years or perpetual
Exercise Price	Below current market price (subscription price)	Above current market price at issuance
Issued to	Existing common shareholders	General public via primary offering
Transferable	Yes — can be bought/sold on exchange	Yes — can be bought/sold on exchange
Level	Exchange Listing	Capital Raising	SEC Registration
Level I	OTC (Pink Sheets) only	Cannot raise new capital	Minimal (exemption)
Level II	NYSE/NASDAQ listed	Cannot raise new capital	Full SEC registration
Level III	NYSE/NASDAQ listed	Can raise new U.S. capital	Full SEC registration + reporting

- ADRs represent shares of foreign companies held by a U.S. depository bank

• Each ADR may represent 1, multiple, or a fraction of a foreign share

• Dividends are paid in U.S. dollars (converted from foreign currency)

---

Liquidation Priority Order

When a company goes bankrupt, assets are distributed in this strict order:

Secured creditors (mortgage bondholders, secured lenders)

Unsecured creditors / general creditors

Subordinated debenture holders

Preferred stockholders

Common stockholders (last — often receive nothing)

> Memory trick: "Secured, Unsecured, Sub, Preferred, Common" — creditors always beat equity holders.

---

Common Exam Traps

• Cumulative vs. non-cumulative: Non-cumulative preferred holders lose missed dividends permanently. Exam often tests whether arrears must be paid.

• Preemptive right: Only triggered when the company issues *new* shares — not on secondary market trades.

• Voting rights: Preferred stockholders typically do NOT vote (unless dividends are in arrears and charter grants it).

• Rights subscription price: Always set below market price to incentivize exercise — if above, no one would subscribe.

• ADR Level I vs. III: Level I cannot raise capital. Level III is the only level that permits new U.S. fundraising.

• Residual claim: Common stockholders are residual claimants — they own what's left, which could be zero in bankruptcy.

• Callable preferred: The issuer calls when rates fall (so they can reissue at lower rates) — bad for investors, good for issuer.