Dictionary › Dilution & financing
Follow-on offering
Also called: secondary offering, underwritten offering, overnight offering, bought deal
A sale of new shares by a company that is already public, usually through underwriters or a placement agent and priced at a discount to the market.
Explanation
After its IPO, a company that needs money can run a follow-on: banks line up investors, often overnight after the market closes, and the shares are priced below the last trade, by a few percent for large companies and often 15% or more for small caps. Underwriters usually get an option to buy up to 15% more shares (the over-allotment or “greenshoe”).
The deal is either firm-commitment (the underwriters buy the shares and resell them) or best-efforts (a placement agent finds buyers but guarantees nothing). It is sold off an effective shelf with a prospectus supplement, or on a Form S-1 by companies that cannot use a shelf. Small-cap deals often bundle each share with a warrant.
People call any follow-on a “secondary offering,” but strictly a secondary is a sale by existing holders. The difference matters: a primary offering issues new shares and dilutes; a secondary only changes who owns existing shares, and the company receives nothing.
Why it matters
Follow-ons are the classic dilution event. The price usually drops toward the offering price on the news, and the size and discount show how badly the company needed the money.
How Equity Dictionary measures it
Prospectuses are classified by deal type, most specific first: debt, equity line, ATM, registered direct, convertible, IPO, resale, private placement and, when nothing more specific applies, follow-on (underwritten, best-efforts or primary). Gross proceeds, price and share count are parsed where the document states them, and the event study measures the share price 1, 5 and 20 trading days after each offering filing.
Related terms
- Registered direct offering (RDO): A sale of registered shares negotiated directly with a few institutional investors through a placement agent, usually at a discount and closed within a day or two.
- Prospectus supplement (424B5): The document a company files under Rule 424(b) to describe a specific offering; Form 424B5 is the usual filing for a stock sale off a shelf.
- Warrants: Contracts issued by a company that let the holder buy new shares at a fixed exercise price until an expiry date, often five years out.
- Dilution: The shrinking of each existing shareholder’s ownership stake when a company issues new shares.
- At-the-market offering (ATM): A program that lets a company sell new shares a little at a time directly into the market at prevailing prices, through a broker acting as its sales agent.
Plain-English summary for research; not legal or investment advice.