What is a Follow-on Public Offering?

Follow-on Public Offering (FPO), a seasoned equity offering, is the method to raise capital by offering additional equity or preference shares after raising funds through an initial public offer.

Pre-Requisites of an FPO

Certain prerequisites for the new offering are categorized as a follow-on public offering. If given to existing shareholders, one such requirement should be offered to the general public, i.e., issued in the open market. It is known as a rights issue or a –bonus issueBonus IssueBonus shares refer to the stocks issued by the companies for free of cost to their existing shareholders in the proportion of their stock holdings. Companies issue such shares to compensate the shareholders with a higher dividend payout in the form of stocks.read more, as the case may be. If offered to a select group of investors, it is a private placementPrivate PlacementPrivate placement of shares refers to the sale of shares of the company to the investors and institutions selected by the company, which generally includes banks, mutual fund companies, wealthy individual investors, insurance companies.read more.

Another point one should remember is that it is an issue through which the company raises money, not a trade made between investors on a stock exchange. IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more or an FPO occurs in the primary market Primary MarketThe primary market is where debt-based, equity-based or any other asset-based securities are created, underwritten and sold off to investors. It is a part of the capital market where new securities are created and directly purchased by the issuer.read more. At the same time, the stock exchange forms the secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more.

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Examples

  • PolarityTE, Inc. (NASDAQ: COOL) issued a follow- on a public offering that closed on June 7, 2018. This FPO was for approx. $55 million of equity shares. The proceeds were used for research and development, commercialization, and registration of products, among many other reasons specified in the SEC filing SEC FilingSEC filings are formal documents submitted to the Securities and Exchange Commission in the United States that contain financial information about the company as well as any other relevant information about recent or upcoming activities.read more. Cantor Fitzgerald was the sole bookrunner BookrunnerA bookrunner is an entity, normally an investment bank that is the lead underwriter or coordinator during initial public offering (IPO) or issuance of new equity or debt. They collect bids from investors and close the bid at an issue price during an IPO. A bookrunner can also coordinate the running of a leveraged buyout (LBO).read more for PolarityTE, Inc. offers.The Trade Desk, Inc. (NASDAQ: TTD), on May 30, 2017, completed a follow-on offering of 4,316,452 shares by selling shares of certain existing stockholders to the public, and therefore, The Trade Desk, Inc. did not receive any proceeds from the offering. That is more of a secondary offering.Huya, a Chinese gaming company, on April 9, 2019, launched a $343 million follow-on offering. It had an over-allotment procedure, also known as a greenshoe.

Types of Follow-on Public Offering

When the company raises capital by issuing completely new shares, the number of shares increases. However, the amount of earnings available for shareholders remains the same. That leads to lower earnings per shareEarnings Per ShareEarnings Per Share (EPS) is a key financial metric that investors use to assess a company’s performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more (EPS). Such an offering is known as a dilutive FPO, leading to a dilution of the EPS.

Whereas, when the company releases the shares previously owned by a promoter group or privately held to the general public, shares may not increase. Therefore, the EPS remains the same. Such an issue is said to be non-dilutive. If the number of shares grows, even in the case of existing shares issued to the public, the issue will again dilute.

Reasons for Follow-on Public Offering

  • A company might wish to pay off an existing debt because debt requires regular interest payments, whether or not the company makes a profit.Also, at times, the company prefers equity issues over debt for future expansions, or the interest rate prevalent in the market is not favorable.At times, the debt holders put highly restrictive covenants on the risk-taking activities of the company and exercise a high degree of control. If the company does not welcome such power as its vision gets restricted, it may go for an FPO and use the proceeds to reduce debt levels and gain greater control.Companies sometimes cannot raise enough capital through their IPO and therefore feel the need to go for an FPO.

This article is a guide to Follow-on Public Offering. Here we discuss Follow-on Public Offering types, reasons, and processes along with examples. You can learn more about financing from the following articles: –

  • CounterpartyPublicly Traded CompaniesPublic Company vs Private CompanyPre IPOSeasoned Equity Offering