What Is a Follow-on Public Offer (FPO)?

What Is a Follow-on Public Offer (FPO)?

Let me explain what a follow-on public offer, or FPO, really is. It's when a company that's already gone public through an initial public offering (IPO) decides to issue new shares to the public. This means additional shares are up for grabs from companies listed on stock exchanges. You might hear them called secondary offerings, and they're mainly a tool for these companies to pull in more capital to fuel their growth.

Key Takeaways

Here's what you need to remember about FPOs. They're about issuing more shares after the IPO. Companies do this to raise equity or cut down on debt. There are dilutive types, where new shares get added, and non-dilutive ones, where existing private shares hit the public market. Then there's the at-the-market offering, which lets a company sell secondary shares any day, based on the current market price, to bring in capital.

How Follow-on Public Offers (FPOs) Work

Public companies can pull off an FPO by putting additional shares out on the open market or through an offer document. This is how they raise extra capital by issuing and selling new shares on a stock exchange. The money from these sales goes straight to the company. Just like with an IPO, they have to file documents with the Securities and Exchange Commission (SEC).

You can use this capital for various things. Often, it's to pay off debt or to drive growth via research and development, launching new products and services, or entering new markets.

Fast Fact

Keep this in mind: unlike an FPO, an IPO is when a private company first issues shares to the public on a stock exchange.

Types of Follow-on Public Offers (FPOs)

There are two primary types of FPOs: dilutive and non-dilutive.

Dilutive Follow-on Offering

In a dilutive FPO, the company's board increases the number of available shares, which dilutes value for existing investors. This is done to raise money for reducing debt or expanding the business, but it boosts the total shares outstanding and can lower earnings per share (EPS). The cash often goes toward cutting debt or tweaking the capital structure, which benefits the company's long-term prospects and, by extension, its shares.

Non-Dilutive Follow-on Offering

A non-dilutive FPO happens when directors or major shareholders sell their privately held shares publicly. The proceeds go to those shareholders, not the company. This often involves founders, board members, or early investors. No new shares are created, so EPS stays the same. These are also known as secondary market offerings.

At-the-Market (ATM) Offering

An ATM offering lets the company raise capital on demand. If the share price isn't right on a given day, they can hold off. These are called controlled equity distributions because they sell into the market at the current price.

Follow-on Public Offerings (FPOs) in the Market

FPOs are a staple in investing. They give companies a straightforward way to raise equity for everyday needs. When a company announces one, their stock price might drop because it dilutes existing shares, and many are priced below market value. In 2024, examples include Longboard Pharmaceuticals issuing 10 million shares for $210 million, and Cyngn with 12.42 million shares for about $20 million.

What Are the Benefits of Follow-on Public Offers?

Public companies opt for FPOs to raise more equity for reasons like paying off debt to better their debt-to-value ratio or funding new projects to spur growth.

What Are the Advantages of At-the-Market Offerings?

ATM offerings come with perks like low market disruption. Companies can raise funds fast without announcements. They're cheaper than traditional FPOs and need less management effort.

What Are the Disadvantages of ATM Offerings?

On the downside, ATM offerings are usually smaller, so they're not ideal for raising big sums. Prices can also swing with the market.

The Bottom Line

Companies typically go for an FPO to fund projects, expansions, debt payoff, or boost working capital. You've got dilutive and non-dilutive types, with shares offered at a fixed price via book-building, and proceeds heading to the company. Existing shareholders can buy more or sell some. It's a debt-free way to access capital markets.