Follow-on offering definition
/What is a Follow-On Offering?
A follow-on offering involves a secondary sale of shares after a company’s initial public offering (IPO) has been completed. This additional offering must be registered with the Securities and Exchange Commission, which includes the issuance of a prospectus. The share price of a follow-on offering is usually set at a small discount to the current market price of the shares that were sold in the issuer’s IPO.
When to Issue a Follow-On Offering
An issuer might choose to engage in a follow-on offering in order to pay down its outstanding debt, pay for acquisitions, fund operations, or even buy back the shares held by existing shareholders. Investors need to be aware of these reasons (which are stated in the prospectus), since they can have an impact on the future market price of the shares.
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Impact of a Follow-On Offering
The initial impact of a follow-on offering is that the issuer’s reported earnings per share will decline somewhat, since there are now more shares in the denominator of the earnings per share equation. This is known as a diluted offering. However, if the shares offered for sale are existing, privately-held shares that are now being offered to the investment community, then there is no reduction in earnings per share. This is known as a non-diluted offering. Privately-held shares are typically owned by the founders of the business or its pre-IPO investors. When privately-held shares are sold through a follow-on offering, the proceeds go straight to the holders of those shares, rather than the issuer.
Terms Similar to Follow-On Offering
A follow-on offering is also known as a secondary offering.