ATM offerings are sometimes referred to as controlled equity distributions because of their ability to sell shares into the secondary trading market at the current prevailing price. In some cases, the company might simply need to raise capital to finance its debt or make acquisitions. In others, the company’s investors might be interested in an offering to cash out of their holdings. The price of follow-on shares is usually at a discount to the current, closing market price. Also, FPO buyers need to understand that investment banks directly working on the offering will tend to focus on marketing efforts rather than purely on valuation. As a means to identify the actual motive behind the stock buyback, investors should factor in a few things like the current trends in stock prices and current earnings per share.

Follow-on Offering (FPO): Definition, 2 Main Types, and Example

When companies launch an FPO, they mostly offer the additional shares at a discount (at a price lower than the current market prices of the shares). This discount makes investing in FPOs an ideal investment opportunity to buy the shares of a company at a lower rate. This is typically done when the company wants to fund new projects or expansions, pay off debt, or increase its working capital.

1. Investments in the securities market are subject to market risk, read all related documents carefully before investing.
2. Non-Dilutive FPO means the shareholders of the company sell their private shares to the public.
3. The renunciation of rights entitlements can happen either by way of rights entitlement trading or off-market transfer.
4. For those new to investing in IPOs, having a solid grasp of these fundamental concepts is crucial.
5. Current shareholders have the chance to increase their ownership in a company at a discounted price through a right issue.

Types of Follow-on Public Offers (FPOs)

An IPO provides companies with access to a vast pool of capital from public investors. Through the process, the company can raise large sums of money for expansion, research and development, debt repayment or other strategic initiatives. Some companies may also conduct follow-on offerings in order to raise capital to refinance debt during times of low interest rates. Investors should be cognizant of the reasons that a company has for a follow-on offering before putting their money into it. A follow-on offering, also known as a follow-on public offering (FPO), is a type of public offering of stock that what is follow on public offer occurs subsequent to the company’s initial public offering (IPO).

There are two types of follow-on offerings – diluted and non-diluted shares. A follow-on offering (FPO) is when a public company issues more shares after their initial public offering (IPO). It happens when the company wants to raise more capital by giving out additional shares to finance projects, pay their debt, or make acquisitions. One example of a type of follow-on offering is an at-the-market offering (ATM offering), which is sometimes called a controlled equity distribution.

FPO tend to have less risk than IPO because the price fixed for an IPO is lower than the market price to attract shareholders to invest more in FPO. Non-Dilutive FPO means the shareholders of the company sell their private shares to the public. Here the money directly goes to the individual offering and not to the company. The reason behind the company performing an FPO is to expand its equity base. The company uses FPO only after the company has started the process of an IPO to make their shares available to the public and to raise capital for their business. Non-dilutive IPO takes place when the larger shareholders of the company like the board of directors or founders sell their privately held shares in the market.

In an ATM offering, exchange-listed companies incrementally sell newly issued shares into the secondary trading market through a designated broker-dealer at prevailing market prices. The issuing company is able to raise capital on an as-needed basis with the option to refrain from offering shares if unsatisfied with the available price on a particular day. 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. Because no new shares are created, the offering is not dilutive to existing shareholders, but the proceeds from the sale do not benefit the company in any way. Usually however, the increase in available shares allows more institutions to take non-trivial positions in the company.

Types of IPO

The shares are offered at a fixed price to the public through a book-building process, with the proceeds going directly to the company. Usually, companies who have faith in their prospects indulge in the practice of repurchasing their company shares. Such a display of confidence is received positively by potential investors and existing shareholders and helps earn their trust significantly. In turn, it helps the company to enhance its market reputation and facilitates an increase in its share value naturally. Non-diluted follow-on offerings happen when holders of existing, privately held shares bring previously issued shares to the public market for sale.

Several shareholders engage in the FPO to buy shares at a discounted market price and sell them in the market to gain a premium on their transaction. However, lower demand of the share price instantly lowers the market price and levels it with the FPO issue price. It is different from an IPO where the company issue its shares to its public for the first time to collect funds in order to grow their business.

1. In turn, it helps the company to enhance its market reputation and facilitates an increase in its share value naturally.
2. The more shares they issue, the larger the denominator in the earnings per share becomes, which reduces the portion of earnings allocated to existing shareholders.
3. However, an FPO is used by a company only to reduce the debt or to raise additional capital of the company.
4. Businesses can raise capital quickly without having to announce the offering.
5. This type of offering is also known as a “follow-on public offer” or “FPO.” Companies usually conduct follow-on offerings when they need additional capital beyond what they raised in their IPO.
6. When companies launch an FPO, they mostly offer the additional shares at a discount (at a price lower than the current market prices of the shares).
7. Usually however, the increase in available shares allows more institutions to take non-trivial positions in the company.

An FPO is generally beneficial for a company looking to raise additional capital after an IPO. It enables the company to access funds from the general public to support its operations, expansion, or other financial needs. There are several reasons why a public company will choose to raise more equity. For example, they might use the proceeds to pay off debt and improve their debt-to-value (DTV) ratio, or they can use the funds to improve the company’s growth by financing new projects. The renunciation of rights entitlements is the process of renouncing or transferring or selling the rights to other interested investors at a better price. Also, shares are separated into diluted and non-diluted shares in a follow-on offering, but shares in an initial public offering are divided into common shares and preferred shares.

More IPO Topic…

In early 2022, AFC Gamma, a commercial real estate company that makes loans to companies in the cannabis industry, announced that it would be conducting a follow-on offering. The company would look to offer 3 million shares of its common stock at a price of $20.50 per share. The underwriters of the offering have a 30-day period in which they can opt to buy an additional 450,000 shares. Any time a company plans to offer additional shares, it must register the FPO offering and provide a prospectus to regulators. Rights issue can lower a stock’s value and decrease trading volume, both of which have an impact on the share price.