A follow-on offering, also known as a secondary offering, is a process through which a company raises additional capital by issuing new shares of stock to the public after its initial public offering (IPO). This allows the company to generate funds for various purposes, such as expanding operations, paying off debts, or funding research and development activities. The key steps involved in the process of a follow-on offering are as follows:
1. Decision and Planning: The first step in a follow-on offering is for the company's management and board of directors to decide whether it is the right time to raise additional capital. They consider factors such as market conditions, the company's financial position, and its growth prospects. If the decision is made to proceed with the offering, the company plans the details, including the number of shares to be issued, the offering price, and any underwriters or investment banks involved.
2. Engagement of Underwriters: To facilitate the offering, the company typically engages one or more underwriters or investment banks. These financial institutions help structure the offering, determine the offering price, and assist in marketing
and distributing the shares to potential investors. The underwriters also provide a commitment to purchase any unsold shares, reducing the risk
for the company.
3. Regulatory Compliance: Before proceeding with the offering, the company must comply with various regulatory requirements. This includes filing a registration statement with the relevant securities regulatory authority, such as the Securities and Exchange Commission
(SEC) in the United States. The registration statement contains detailed information about the company's financials, operations, and risks associated with investing in its securities.
4. Due Diligence
: As part of the regulatory compliance process, the company undergoes a thorough due diligence review. This involves providing extensive documentation and information to the underwriters and regulators to ensure accuracy and transparency
. The underwriters also conduct their own due diligence to assess the company's financial health and prospects.
5. Pricing and Allocation: Once the regulatory review is complete, the underwriters work with the company to determine the offering price. This price is typically set at a discount to the prevailing market price to incentivize investors. The underwriters also allocate the shares among institutional investors, retail investors, and other interested parties.
6. Marketing and Roadshow: To generate interest
and attract potential investors, the company and its underwriters embark on a marketing campaign
. This includes organizing roadshows, where management presents the company's investment thesis
and growth prospects to institutional investors. The underwriters also distribute the preliminary prospectus, known as a red herring, which provides key information about the offering.
7. Bookbuilding and Pricing: During the marketing period, institutional investors indicate their interest in purchasing shares through a process called bookbuilding. The underwriters compile these indications of interest to gauge demand and determine the final offering price. The offering price is typically set at the highest price that will attract sufficient demand for all the shares being offered.
8. Closing and Settlement: Once the offering price is determined, the company and underwriters finalize the offering by executing an underwriting
agreement. This agreement outlines the terms and conditions of the offering and establishes the obligations of both parties. After closing, the underwriters purchase the shares from the company at the offering price and distribute them to investors.
9. Post-Offering Compliance: Following the completion of the follow-on offering, the company must fulfill ongoing compliance requirements. This includes filing periodic reports with regulatory authorities, such as quarterly and annual financial statements, to keep investors informed about its financial performance and operations.
In summary, a follow-on offering involves several key steps, including decision-making, engagement of underwriters, regulatory compliance, due diligence, pricing and allocation, marketing and roadshows, bookbuilding and pricing, closing and settlement, and post-offering compliance. Each step is crucial in ensuring a successful offering and raising the desired capital for the company's growth and expansion.