Definition / Examples of Subsequent Public Offerings
How does a subsequent public offering work?
Types of Subsequent Public Offerings
Alternatives to Subsequent Public Offerings
Subsequent Public Offering vs Initial Public Offering
What does this mean for individual investors?
Definition / Examples of Subsequent Public Offerings
A subsequent public offering is a way for an already listed company to raise additional capital by issuing new shares to the public.
The definition of a subsequent public offering is when a company that is already publicly listed issues additional shares after its initial public offering (IPO). A subsequent public offering allows companies to raise the additional capital they need to expand their operations, reduce debt, or for any other purpose. However, the company must already be listed to participate in a subsequent public offering.
Subsequent public offerings are not uncommon in the corporate world. Major tech companies like Meta (formerly Facebook), Google, and Tesla have issued subsequent offerings over the past several decades to raise capital during their growth years.
A recent example of a subsequent public offering occurred in April 2021 when Upstart Holdings, Inc. filed a registration statement with the Securities and Exchange Commission. The company announced that it was offering 2,000,000 additional shares of common stock in a public offering, along with 300,000 additional shares as an optional purchase for major shareholders.
Prior to the subsequent public offering, Upstart had about 73.63 million shares outstanding. Since the company increased the outstanding shares by a relatively small number compared to the total number of outstanding shares, it would not have a significant impact on each shareholder’s stake in the company. However, an increase in the number of shares does lead to slight dilution for each existing share.
In its statement, Upstart announced that it intends to use the capital raised in the subsequent public offering for general corporate purposes.
How does a subsequent public offering work?
Going public allows a company to raise significant capital by offering shares to the public for investors to buy. However, in some cases, a company may find that it needs to raise additional capital in the future. In this case, the company will issue a subsequent public offering.
To issue a subsequent public offering, a company must meet certain requirements: the company must already be listed on a stock exchange. The company must offer its newly issued shares to the general public, not just its existing shareholders.
The process of raising funds in a subsequent public offering is lengthy and often involves creating a prospectus, waiting to receive interest, and then allocating shares to investors. Although it is a process similar to an initial public offering, the company cannot initiate a subsequent public offering without already being listed.
Let’s say XYZ Clothing Company went public in 2020 by selling T-shirts. At the time of the initial public offering, the company registered 100 shares with the Securities and Exchange Commission (SEC). The company used the capital it raised to buy new stores and hire additional staff.
But just a year later, XYZ Clothing Company found itself struggling to keep up with demand and needed to expand its manufacturing capacity. To help fund this effort, the company decided to issue a subsequent offering, issuing another 100 shares of stock – again registering with the SEC.
After the initial public offering, the company had only 100 shares, meaning each share represented 1% of ownership in the company. Now that it has issued 100 more shares, each share represents 0.5% of ownership in the company. This means that unless existing shareholders purchase new shares, they have lost some of their stake in the company.
Is considered
The subsequent public offering is a type of secondary offering, which occurs any time shares are sold after the initial offering (or initial public offering, IPO). Although a subsequent public offering is a secondary offering, not every secondary offering is a subsequent public offering.
Types of Subsequent Public Offerings
There are two types of subsequent public offerings that a company can issue: diluted and non-diluted.
The diluted subsequent public offering is when the company issues new shares, thereby increasing the number of outstanding shares. Companies do this to raise additional capital. With this type of offering, all existing shares are diluted.
The non-diluted subsequent public offering is when the company does not issue new shares, but rather existing shareholders sell their shares in the public market. In the case of a non-diluted subsequent public offering, the proceeds from the sale go to the selling shareholders rather than the company itself. This means it does not lead to an increase in the number of shares for the company.
Alternatives to Subsequent Public Offerings
A subsequent public offering is one of the strategies that a public company can use to raise capital, but it is not the only strategy. Companies can also raise additional capital through borrowing — whether from a bank or by issuing bonds.
Borrowing has some pros and cons compared to issuing new shares. The advantage of borrowing is that the company does not dilute its existing shares, which benefits current shareholders. The disadvantage is that the company must pay interest on the borrowed money, making capital more expensive in the end.
Subsequent Public Offering vs. Initial Public Offering
Subsequent Public Offering (FPO) Initial Public Offering (IPO)
The company is already listed The company goes public for the first time
Used by companies to raise capital Used by companies to raise capital
Shares are usually sold at a discount Shares are sold at a price determined through market research
Diluted shares vs. non-diluted shares Common shares vs. preferred shares
Less risky, as the company has already proven itself in the market More risky, as the company has not yet proven itself in the market
An initial public offering (IPO) is when a company issues shares to the public for the first time. Before the IPO, companies are typically funded only by owners and often a few investors. Public companies go public, typically as a means to raise capital to expand their business.
Although there are some similarities between an IPO and a subsequent public offering — in both cases, the company issues new shares to the public for purchase — there are some notable differences. The most obvious difference is that while an IPO is when a company becomes public for the first time, the company that issues a subsequent public offering is already public.
Another difference is how the shares are priced in an IPO versus a subsequent public offering. In the case of an IPO, companies conduct extensive market research to determine the appropriate price. In a subsequent public offering, the price of the new shares is often lowered compared to the current stock price to attract buyers.
A key difference between subsequent public offerings and initial public offerings is the factor related to the risk involved in investing in each. According to the Securities and Exchange Commission, buying shares during or immediately after an IPO can be risky for investors. But in the case of a subsequent public offering, the company has been public for some time, so investors can easily see its track record.
What
What It Means for Individual Investors
If the company you invested in announces a follow-on public offering, it’s important to pay attention to that. Follow-on public offerings often lead to dilution of existing shares, meaning each share you own will represent a smaller percentage of ownership in the company. In the future, this could mean lower dividends if the company distributes dividends to shareholders.
On the other hand, if the company you were considering investing in is issuing a follow-on public offering, it could be an excellent opportunity. Companies often issue follow-on public offering shares at a discounted price to attract buyers. In other words, a follow-on public offering can be an opportunity to purchase shares at a reduced price.
Source: https://www.thebalancemoney.com/what-is-a-follow-on-public-offer-fpo-5197990
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