In a dilutive offering, the company issues new shares, increasing the number of outstanding shares and potentially diluting the ownership stake of existing shareholders. In the case of the dilutive offering, the company’s board of directors agrees to increase the share float for the purpose of selling more equity in the company. This new inflow of cash might be used to pay off some debt or used for needed company expansion. When new shares are created and then sold by the company, the number of shares outstanding increases and this causes dilution of the earnings per share. Usually the gain of cash inflow from the sale is strategic and is considered positive for the longer-term goals of the company and its shareholders. Some owners of the stock however may not view the event as favorably over a more short term valuation horizon.
What Are the Benefits of Follow-On Public Offers (FPOs)?
An initial public offering (IPO) is when a private company goes public, listing its shares on an exchange for the first time for the public to purchase. A follow-on offering is when an already existing public company (one that has completed an IPO) sells more shares to the public to raise additional capital. Follow-on offerings allow companies to raise additional capital, increase their market exposure, and enhance their reputation among investors. However, they also carry risks, such as diluting existing shareholders’ ownership, over-saturating the market with shares, and the risk of underpricing the offering. The other name for Follow-on Public Offering (FPO) is Secondary Public Offering (SPO). Both terms refer to the process of a company offering additional shares to the public after its initial public offering.
Is a Follow-on Offering a Primary or Secondary Offering?
- It happens when the company wants to raise more capital by giving out additional shares to finance projects, pay their debt, or make acquisitions.
- In a non-dilutive secondary offering, a company commences a sale of securities in which one or more of their major stockholders sells all or a large portion of their holdings.
- At the time of the IPO, the company registered 100 shares with the Securities and Exchange Commission (SEC).
- Dilutive FPO is when the new offer of shares actually increases the number of outstanding shares of the company.
Similarly, if a listed company needs financing it can either take debt or issue new shares through FPO. If a company you’re invested in has announced a follow-on offering, it’s worth paying attention to. FPOs often dilute existing shares, meaning each of your shares will represent a smaller percentage of ownership in the company.
What Is a Follow-on Offering (FPO)?
An at-the-market (ATM) offering gives the issuing company the ability to raise capital as needed. If the company is not satisfied with the available price of shares on a given day, it can refrain from offering shares. In fact, a lot of times the price fixed for an IPO is kept lower than the market price to induce shareholders to invest in the FPO. ATM offerings typically involve smaller amounts of capital compared to traditional follow-on offerings. Therefore, if a business aims to raise a substantial capital sum, this may not be the preferred method. At-the-market (ATM) offerings offer various benefits, including minimal market impact.
What are the key regulatory and legal aspects that companies need to consider when conducting secondary offerings?
The SEC must approve all registrations for public offerings of corporate securities in the United States. An investment underwriter usually manages or facilitates public offerings. While they offer numerous advantages, they also come with potential drawbacks and risks. Companies considering secondary offerings must carefully weigh these factors and what is follow on public offer work closely with experienced advisors to ensure a successful outcome. Investment banks and financial advisors guide companies through the secondary offering process, providing essential services such as due diligence, pricing, and marketing.
We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. Andy Smith is a Certified Financial Planner (CFP®), licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career. Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. So, this blog will cover FPO basics, why companies choose them, and what to consider before investing.
In the case of the IPO, companies go through extensive market research to nail down the right price. In the case of an FPO, the new shares are often discounted compared to the current share price to entice buyers. Major tech companies such as Meta (formerly Facebook), Google, and Tesla have issued follow-on offers over the past several decades to raise capital during their growth years. Follow-on financing is when a startup that has already raised capital raises additional capital through another round of funding.