Subsequent Offerings: Definition, Process, and Considerations

The term subsequent offering refers to the issuance of additional stock shares after a company has already gone public through an initial public offering (IPO). Subsequent offerings are made by companies that are already publicly traded or by existing shareholders. These offerings are commonly conducted on a stock exchange through the secondary market, especially when they’re offered to the general public. The primary purposes of subsequent offerings are to raise capital or to boost cash reserves. As such, they may take on the form of dilutive or non-dilutive offerings.

When a business transitions from a private to a public company, it announces its intention to raise capital by issuing shares through an initial public offering (IPO). The company typically enlists one or more banks to act as underwriters to price the shares, market, and advertise the offering. After the IPO, the company sells shares to institutional and other large investors on the primary market, and these shares begin trading on the secondary market to the general public.

Subsequent offerings occur after a company has already gone public. They may also be referred to as follow-on offerings or follow-on public offerings (FPOs). Unlike IPOs, the prices for subsequent offerings are generally driven by the market rather than being determined by underwriters.

These offerings can be initiated by the company itself, where the company decides to issue new shares on the market. Alternatively, existing shareholders, such as company management or founders, may choose to sell their shares on the market through a subsequent offering.

Companies must register any subsequent or follow-on offerings with the Securities and Exchange Commission (SEC) as these offerings are regulated by federal law.

Subsequent offerings can be categorized as either dilutive or non-dilutive.

In a dilutive subsequent offering, the issuing company creates new shares of stock, thereby increasing the total number of shares outstanding. Consequently, issuing these shares dilutes earnings on a per-share basis. Companies may pursue dilutive subsequent offerings to raise capital for various purposes such as funding new operations or projects, paying off debt, or continuing growth plans. Another reason for a dilutive offering may be to maintain the company’s debt-to-value ratio while boosting cash reserves.

In a non-dilutive subsequent offering, privately held shares of the company, owned by founders, directors, or other insiders, are offered for sale to the public. Since no new shares of the company’s stock are created, earnings are not diluted on a per-share basis. Insiders often opt for non-dilutive subsequent offerings to take advantage of high demand for company shares, allowing them to diversify personal or business holdings or lock in gains on their investment. Initial shareholders may pursue a subsequent offering after fulfilling a required holding period post-IPO.

Investors should pay attention to subsequent offerings and understand their implications for their investment holdings. Whether an offering is dilutive or non-dilutive, and who is making the shares available, can significantly affect investors’ positions in the company. Dilutive offerings increase the number of shares outstanding, potentially diluting earnings per share, while non-dilutive offerings involve the sale of existing shares without creating new ones. Investors should carefully evaluate the offer price and consider any insights from insiders, such as company founders or executives, who may be selling their shares.

A subsequent offering is typically conducted to raise capital or boost cash reserves for a publicly traded company.

Unlike initial public offerings (IPOs), subsequent offerings are usually priced by the market rather than underwriters.

Dilutive subsequent offerings increase the number of outstanding shares, potentially diluting earnings on a per-share basis.

Insiders may opt for non-dilutive subsequent offerings to diversify their holdings or lock in gains on their investment without diluting earnings per share.