What is a Follow-On Offering?
A follow-on offering is when a public company that is already listed on an exchange issues shares to investors.
These shares are frequently, but not always, offered at a modest discount from the closing market price on the day of the transaction. Similar to an IPO, the company will register the shares with the SEC, work with underwriters to sell the stock, and provide a prospectus for potential investors.
Depending on the type of follow-on that a company offers, it may or may not affect existing shareholders’ ownership percentages. The types of follow-on offerings are:
- Dilutive Follow-Ons: In a dilutive follow-on, the company will issue additional shares of its stock, and retain the proceeds. When new shares are distributed into the market, the ownership percentage of existing shares is reduced, or diluted.
- Non-Dilutive Follow-Ons: In a non-dilutive follow-on, existing privately hel d shares of a company are sold to the public by shareholders. The shareholders (not the company) retain the proceeds. These shares are typically sold by a company’s founders, employees, and pre-IPO investors. Since no new shares are distributed into the market, the ownership percentage of existing shares is not affected.
Companies can also execute a hybrid follow-on where they would be issuing new stock, in conjunction with existing shareholders selling their stock.
Why Would a Company Have a Follow-On Offering?
A company will have a follow-on for the same reasons they would conduct an IPO. In a dilutive offering, the company's board of directors agrees to increase the number of shares outstanding, or share float. This new inflow of cash might be used to pay off debt or for company expansion.
In a non-dilutive offering, privately held shares are made available for sale by company directors or other investors who may be looking to diversify their holdings or monetize their investment in the company. Since no new shares are created, the offering is not dilutive to existing shareholders, but the proceeds from the sale do not directly benefit the company.
How is a Follow-On Offering Different from an IPO?
A follow-on is different from an IPO in a few ways:
- A follow-on occurs once a stock is already public, while an IPO is the first sale of a company’s stock to the public.
- Follow-ons have an existing point of reference for the offer price because the stock has already traded on a public stock exchange, while an IPO has no public trading history. Learn More About Follow-On Pricing
- The roadshow for a follow-on is usually much shorter than the IPO roadshow, typically 1-5 days, whereas an IPO roadshow can last 2 weeks.
- There are typically more follow-on offerings per year than IPOs and a company can have more than one follow-on.
It’s important for investors who are considering a follow-on to be aware of the way they are priced. Learn More About Follow-On Pricing