When companies are already trading at a stock exchange, they can use at-the-market offerings to sell more stock in a follow-up listing—selling newly issued stocks through a broker to the open market with market valuations.
This can be done on terms and prices set by the issuing company, giving the company flexibility to choose a start and stop sales points. It provides the company with full control of the sale and the ability to halt selling if the stock dip or issue more if it rises.
Compared to a new issue where a company offers a specific amount of pre-valued stocks sold in bulk to the market with a set price. Since at-the-market offerings don't have to sell all the stocks at once, brokers can spread the sale over time to optimize the issuer's best sales price.
An at-the-market offering is a standard tool used to publicly traded companies taking advantage of rising stock markets to access cheap funding by issuing new shares or stock classes.
Form S-3 from the Securities and Exchange Commission is a simplified registration for companies already fulfilling the SEC stock issuing requirements. The form is used by companies already trading on US stock exchanges for registering additional shares sold on the market in at-the-market offerings. Companies utilizing the S-3 must meet the SEC's criteria, such as not having missed a debt or dividend payment for the 12 months before filling.
Follow-on offerings (FPO) and at-the-market offerings (ATM) have in common that the company already trade on a public exchange. An at-the-market offering is a tool utilized by a traded company at any time to raise capital by issuing new shares. Follow-on offerings are issuing new or existing shares in a company after an initial public offering (IPO).
At-the-market offerings can be stretched over time, making sure the issuer gets the best possible price for the new share sold. Follow-on offerings follow shortly after an IPO, making the placement riskier depending on how the market valued the IPO. FPOs can often hurt the market, as investors question the dilution of new shareholders shortly after the IPO.
Rule 415 is a Security and Exchange Commission (SEC) regulation allowing companies to register security issues intended for sale in the future. This allows a company to register new shares intended for sale within a period of 2 years, giving room for timing the deal for the best possible market conditions. The offering only requires one prospectus but can be sold off in several batches to the market within the set timeframe.
During both at-the-market and follow-on offerings, the issuing company is selling out new stocks to the market. Commonly known as equity dilution, the new shares added to the market decrease current shareholders' ownership percentage.
The new issuing does increase the number of shares publicly traded on the market, decreasing the shareholder ownership percentage. This doesn't mean the investor has fewer shares, but the percentage owned is affected negatively by the increased amount of shares available.
This is an effective way for significant shareholders to decrease their percentage ownership to comply with regulations without selling their stake in the company.
While it might be a useful tool for significant shareholders, minority shareholders might find dilution negative as they unwillingly lose ownership percentages.
Previously any company intending to do a shelf-registration for an at-the-market offering would have to name the agent associated with the offering. Any offering could not exceed 10% of the traded stocks held by outside investors not affiliated with the agent or management. After a change done by the Securities and Exchange Commission in 2005, these regulations were removed, allowing companies to register shelf-offerings without naming an agent.
A principal at-the-market offering is when the companies inventory of shares is used to complete the offering directly to the market. Agency at-the-market offering is when the company uses a brokerage to find buyers for chunks of the newly issued shares. Using a brokerage will allow larger pieces of stock to be moved simultaneously but might also have adverse effects on the share price due to massive ownership changes. Principal offerings enable companies to push small amounts of new shares into the market slowly, not making any noticeable changes in active shares in the short-term.
Both offerings have their benefits as agency offerings might allow for fast transactions with opportunistic timing, while principal offerings might cover up current shareholders' dilution short-term, avoiding massive movement in share prices.