One recent example of an FPO occurred in April 2021 when the company Upstart Holdings, Inc. filed a registration statement with the Securities and Exchange Commission. The company announced it was offering an additional 2,000,000 shares of common stock in a public offering, as well as an additional 300,000 as an optional purchase for the underwriters. Before the FPO, Upstart had roughly 73.63 million shares outstanding. Because the company increased its outstanding shares by a relatively small number compared to the total number of shares outstanding, it wouldn’t have had a significant impact on each shareholder’s stake in the company. However, increasing the number of shares does slightly dilute each existing share. In its statement, Upstart announced it planned to use the capital raised in the FPO for general corporate purposes.
Alternate names: Follow-on offering, follow-on issue, follow-on share saleAcronym: FPO
How Does a Follow-On Public Offer Work?
Going public allows a company to raise significant capital by offering public shares for investors to purchase. But in some situations, a company might find it needs to raise additional capital down the road. In that case, it would issue an FPO. To issue an FPO, a company must meet a few requirements:
It must already be a publicly traded company.The company must offer its newly issued shares to the general public, not just its existing shareholders.
Suppose clothing company XYZ went public in 2020 selling T-shirts. At the time of the IPO, the company registered 100 shares with the Securities and Exchange Commission (SEC). The company used the capital it raised to purchase new storefronts and hire additional staff. But just one year later, clothing company XYZ finds it’s having a hard time keeping up with demand and needs to expand its manufacturing. To help finance this endeavor, the company decides to issue a follow-on offering, issuing another 100 shares of stock—once again registering them with the SEC. After the IPO, the company had just 100 shares, meaning each share was worth 1% ownership in the company. Now that it’s issued another 100 shares, each share represents 0.5% ownership in the company. That means that unless existing shareholders purchase new shares, they’ve lost some of their stake in the company.
Types of Follow-On Public Offer
There are two types of FPOs a company can issue: diluted and non-diluted.
Diluted FPO
A diluted FPO is when a company issues new shares of stock, therefore increasing the number of outstanding shares. Companies do this to raise additional capital. With this type of offering, all existing shares are diluted.
Non-Diluted FPO
A non-diluted FPO is when a company doesn’t issue new shares of stock, but instead, existing shareholders sell their shares in a public market. In the case of a non-diluted FPO, the proceeds of the sales go to the shareholders who are selling their shares rather than to the company itself. This means it does not result in additional shares for the company.
Alternatives to Follow-On Public Offer
An FPO is one strategy a public company can use to raise capital, but it’s not the only one. Another way companies can raise additional capital is through borrowing—either borrowing from a bank or by issuing bonds. Borrowing has some pros and cons compared to issuing new shares. The advantage of borrowing is that the company doesn’t dilute its existing shares, which benefits existing shareholders. The downside is that a company has to pay interest on borrowed money, which ultimately makes the capital more expensive.
Follow-On Public Offer vs. Initial Public Offer
While there are some similarities between an IPO and an FPO—in both cases, the company is issuing new shares for the public to purchase—there are some notable differences. The most obvious difference is that while an IPO is when a company goes public for the first time, a company issuing an FPO is already public. Another difference is how companies price their shares during the IPO versus the FPO. In the case of the IPO, companies go through extensive market research to nail down the right price. In the case of an FPO, the new shares are often discounted compared to the current share price to entice buyers.
What It Means for Individual Investors
If a company you’re invested in has announced a follow-on offering, it’s worth paying attention to. FPOs often dilute existing shares, meaning each of your shares will represent a smaller percentage of ownership in the company. In the future, that could mean lower dividends if and when the company passes its profits along to shareholders. On the other hand, if a company you’ve been considering investing in is issuing an FPO, it could be an excellent opportunity. Companies often issue their FPO shares at a discounted rate to entice buyers. In other words, the FPO could be an opportunity essentially to buy shares on sale.
