How Does Follow-On Offering Pricing Work?

The process by which an follow-on is priced is similar to an IPO, with the company and investment banks meeting with investors to solicit indications of interest and setting the follow-on Offer Price based on estimated demand from investors.

One of the biggest differences between an IPO and a follow-on is that the company does not provide investors with an estimated Offer Price during the roadshow. In an IPO, a company’s stock has not traded before, so an estimated price range is provided to investors in the prospectus to guide their expectations. In a follow-on, the company’s stock has already been trading publicly. A recent closing stock price is provided to investors in the prospectus, and the stock will continue to trade on the public exchange during the offering. The market price serves as a reference point for investors in the follow-on. In either an IPO or follow-on, the Offer Price may be below, at or potentially above the recent closing stock price listed in the prospectus, or the most recent market price, based on ultimate demand for the offering and trading activity in the market.

Follow-On Offering Filing and Pricing Timeline

An illustrative follow-on offering filing and pricing timeline looks like this:

  • Step One: First, the company will register its follow-on with the SEC, similar to an IPO. This filing will customarily include a preliminary prospectus, which will list the last closing price of its public stock and other important information.
  • Step Two: After the company files its follow-on, the roadshow will begin. Similar to the IPO process, company’s management and banks may meet with investors to try to determine demand for the offering, and take reservations. During the roadshow, the company’s stock will continue to trade in the public market, and it is common for the price to fluctuate during the roadshow. The roadshow period may be shorter than for the IPO, and the offering may proceed to pricing quickly.
  • Step Three: After the roadshow ends, the company and underwriters will set the final Offer Price, typically after the market closes. This final price can either be at a modest discount from the price disclosed in the prospectus or recent closing market price, or a higher, premium price, based on the demand generated during the roadshow. It is also possible for the final price to be the same as the closing market price.
  • Step Four: After the follow-on Offer Price is set, stock will be allocated to investors before the market opens the next morning.
How Have Follow-Ons Typically Priced in the Past?

Not every follow-on will have a discount and some may even be priced at a premium (higher price). It’s important for investors who are considering a follow-on to understand that the Offer Price likely will vary from the most recent closing price disclosed in the prospectus, or the most recent market price, and may not be sold at a discount.

Why Would a Company Choose to Sell the New Shares at a Premium?

Sometimes, a follow-on may be priced at a premium because the company received indications of interest, or reservations, from large institutional investors at a set price that is actually a premium from current market value.

Often, the follow-on provides a way for institutional investors to buy large amounts of that company’s stock in one transaction--which may not be possible if there are not many shares trading publicly. Large investors might not mind buying the stock at a premium because they are less interested in the day-to-day price fluctuations but more focused on owning many shares of that company.