Follow-on Public Offering

Follow-on Public Offering (FPO) is the method to raise capital by offering additional equity or preference shares after raising funds through an initial public offer. It is a seasoned equity offering that gives investors an opportunity to increase their stakes in the companies.

FPO is different from an Initial Public Offering (IPO), which is the first issue of a company. Through FPO, companies expand their equity base by considering shares for sale to existing shareholders and investors, while through IPO, companies sell shares to the general public to build a strong investor base.

Key Takeaways                                                               

• Follow-on Public Offering (FPO) is a method of raising capital by issuing additional equity or preference shares after a company has already conducted an Initial Public Offering (IPO). 
• Examples of companies that have undertaken Follow-on Public Offerings include PolarityTE, Inc. (NASDAQ: COOL), The Trade Desk, Inc. (NASDAQ: TTD), and Huya. 
• In a dilutive FPO, where new shares are issued, the number of shares increases while the earnings available to shareholders remain the same. This can decrease Earnings Per Share (EPS) due to the dilution effect caused by the additional shares issued.

Follow-on public offering (FPO) is a scheme under which an organization that is already listed on the stock exchange issues extra shares after the initial public offering (IPO). Being the follow-up issue of the latter, it has been named as a follow-on public offer. It helps entities diversify equity and ensure raising additional capital for their business. Like an IPO, the entities must fill in the related documents for registration with the United States Securities and Exchange Commission (SEC) if they want to execute the FPOs.

While FPOs help businesses have funds to take care of their additional expenses, they allow investors and shareholders to have opportunities to increase their stake in the company. The shares under this scheme are offered at a discounted rate. As a result, they attract more and more retail investors, who show interest in having more stake in the companies at a cheaper cost.

When more investors invest in a company’s shares, it automatically attracts the attention of other investors who are keen to make investments. The increased investment opportunities with a company reflect its potential growth prospects.

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 issue, as the case may be. If offered to a select group of investors, it is a private placement.

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. IPO or an FPO occurs in the primary market. At the same time, the stock exchange forms the secondary market.

Let us consider the following examples to check how follow-on public offering works:

• 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. Cantor Fitzgerald was the sole bookrunner 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.

An FPO exists in two broad forms – dilutive FPO and non-dilutive FPO.

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 share (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.

When an entity already issues IPOs, there is always doubt over their issuance of FPOs. The reasons behind the companies offering the latter, therefore, has been listed below:

• 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.

The follow-on public offering is a scheme that has multiple benefits. It not only turns advantageous for companies, but also for investors who get the shares at a less expensive rate and get a higher stake in the company, in return.

• It helps in raising additional capital for an organization or company.
• The FPO scheme increases the liquidity of the company as it allows the latter to make available more shares for issuance.
• The companies get an opportunity to diversify their investor base by making available an additional scheme to issue shares.
• When more investors in a company increase, it indicates better growth and performance of the entity. Hence, the company becomes a well-reputed market entity.

The FPO does have a lot of benefits, but it is not devoid of disadvantages. There is one limitation of the process that must be known to the companies before they issue additional shares to the investors/shareholders.

• If the form of FPO is dilutive, it reduces the earnings per share (EPS) because the company starts issuing new shares, which puts an extra obligation on it.