What is a Follow-on Public Offer (FPO)?

When a company begins operations, it raises small sums of money from venture capitalists and angel investors. As the company expands, it raises additional capital in the form of equities and debts. An IPO occurs when a company raises funds for the first time by allotting shares. When shares are offered for sale multiple times in a row, this is referred to as FPO.

 

What is FPO?

 

A follow-on public offering (FPO) is the issuance of shares to investors by a publicly traded company. A follow-on offering is an additional share issuance made by a company following an initial public offering (IPO). Secondary offerings are another term for follow-on offerings.

 

A public company can also benefit from an FPO via an offer document. FPOs should not be confused with IPOs, which are initial public offerings of stock to the general public. FPOs are secondary issues issued after a company is listed on an exchange. The proceeds of the sale go to the company that issued the stock. Companies that want to conduct a follow-on public offering, like an IPO, must file SEC documents.

 

In the investment world, follow-on offerings are common. They make it simple for businesses to raise equity that can be used for a variety of purposes. Share prices of companies that announce secondary offerings may fall as a result. Secondary offerings frequently elicit negative reactions from shareholders because they dilute existing shares and many are introduced at below-market prices.

 

Many companies had follow-on offerings in 2015 after going public less than a year before. Shake Shack's stock dropped after news of a secondary offering surfaced. Shares fell 16% following news of a large secondary offering that came in below the current share price.

 

In 2017, companies raised $142.3 billion in equity through follow-on offerings. In 2017, there were a total of 737 FPOs. The number of FPOs increased by 21% compared to 2016. However, the value of FPOs fell 3% year on year in 2017.

 

A follow-on public offer (FPO) is when a publicly traded company that is already listed on a stock exchange issues shares to the general public. A follow-on public offering allows companies to raise additional capital for business expansion, debt reduction, or other purposes. However, the company must have already gone public through an IPO, in which it first issued shares to the general public. Furthermore, the shares offered through the FPO must be available to the general public, not just existing shareholders.

 

How does FPO Work?

 

The share price during the IPO is determined by the company's performance, and the company hopes to achieve the desired price per share during the IPO listing. However, because FPO is already traded on the stock exchange, the share price is market-driven. As a result, before purchasing, the investor will have a better understanding of the company's valuation. Furthermore, the price of follow-on public shares is usually lower than the current trading price.

 

The company seeks an FPO for a variety of reasons, including the need for funds to finance debt or make an acquisition. Existing shareholders may be interested in offering to cash out their existing holdings in some cases. In other cases, businesses want to raise capital to refinance their debt during a period of low-interest rates. As a result, before applying for an FPO, investors must exercise caution and carefully consider the reasons for the company's offering.

 

Going public enables a company to raise significant capital by selling public shares to investors. However, in some cases, a company may need to raise additional capital in the future. In that case, an FPO would be issued.

 

A company must meet the following requirements to issue an FPO:

 

• It has to be a publicly traded company already.

• The company must make newly issued shares available to the general public, not just existing shareholders.

 

For a variety of reasons, a company may require a follow-on offering to raise "additional capital," which is accomplished by conducting a dilutive FPO in which new shares are offered and new money is generated.

 

The issue price of an FPO is typically lower than the market price. This is done by the company to increase the number of subscribers to its issue. Lower demand for listed shares eventually drives down the market price, bringing it in line with the FPO issue price.

 

Types of FPO

 

FPO is an abbreviation for follow-on public offering. It is the process by which an existing stock exchange-listed company issues new shares to existing and new shareholders. This corporate event occurs following the company's initial public offering (IPO).

 

The company issues a follow-on public offer because it requires additional capital to expand its business or to supplement its equity base. A company may also issue an FPO to reduce its debt burden. There are primarily two types of FPO:

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Types of FPO

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1. Diluted FPO:

 

The first type of FPO is a diluted FPO, in which the company issues more new shares. This increases the number of outstanding shares of the company while decreasing earnings per share. The funds raised during this process are typically used to reduce a company's debt or change the capital structure of the company.

 

A dilutive FPO is one in which the company issues new shares, increasing the total number of shares outstanding. This type of FPO is used to fund business expansion or to reduce the company's debt burden. The existing shareholders' ownership is diluted in this type of FPO.

 

2. Non-Dilutive FPO:

 

A non-dilutive FPO is one in which the issued shares are already in existence. The company does not issue new stock. The company's directors or large shareholders offer their stakes for sale to the general public.

 

As a result, a non-dilutive FPO does not affect existing shareholders' shareholding. This type of FPO is typically used to comply with regulators' minimum shareholding requirements or to change the shareholding ownership pattern.

 

Non-diluted follow-on offerings occur when existing stockholders sell their shares to the general public. Earnings per share remain unchanged because no new shares are issued in the market and the shares offered for sale are already existing. When the shares are sold, the proceeds are returned to the original stockholders. Secondary market offerings are another term for non-diluted offerings.

 

Initial Public Offering vs Follow-up Public Offering

 

When an unlisted company issues shares to the public for the first time and is listed on the stock exchange, this is known as an initial public offering. FPO, on the other hand, is a process that occurs following an IPO in which the company issues additional shares to the public. 

 

The risk factor associated with investing in FPOs and IPOs is a key distinction. Buying shares during or immediately after an IPO, according to the SEC, can be risky for investors. 3 However, in the case of an FPO, the company has already been publicly traded for some time, allowing investors to assess its track record easily. The distinction between the two is discussed further below:

 

1. The Goal:

 

The goal of an IPO is to raise capital by taking ownership of the company's shares available to the public. After an IPO, the company may require additional funds for expansion, which is when FPOs are issued. An FPO's goal is to diversify public ownership. It may also be issued to dilute the promoter's stake.

 

2. Performance:

 

Another significant distinction between an IPO and an FPO is how much information an investor has about the company before purchasing allotted shares.

 

In the case of an IPO, investors must rely solely on the company's red herring prospectus. Most investors prefer to subscribe to an IPO based on the company's market interest, management, debt on the books, and so on. Investors in this case have no guidance or track record on the company.

 

In the case of an FPO, investors have a history of how the company has performed and previous market interest. Equity stake sales can be a good indicator of whether a stock is worth buying.

 

3. Profitability:

 

Investing in an IPO is riskier, but it can be more profitable than FPOs because it participates in the company's initial growth. FPOs are less risky than IPOs because there is more transparency and information about the company available to investors. Before investing, investors can examine the company's past performance and make assumptions about its future growth prospects. FPOs are less profitable than IPOs because the company is stabilizing during the FPO stage.

 

Private entities generally use IPOs to increase their equity base, whereas government entities use FPOs to reduce their debt burden or reduce their stakes in the company.

 

During an IPO, investors must conduct extensive research and analysis on the company because it was previously a private company; however, in an FPO, the company is already listed on the exchanges and has some operating history as a publicly available company, making it relatively easy for investors to make an investment decision in an FPO.

 

When a company issues its initial public offering (IPO), the issue price is either fixed or variable. When a company issues an FPO, the issue price is determined by the general market.

 

Conclusion

 

To summarize, IPOs are more profitable than FPOs because they are riskier, and no one knows how an IPO will perform. As a result, it is critical to delve deeper into the company's prospects and fundamentals. In the case of an FPO, however, investors have a wealth of information about the company. As an investor, you must consider the purpose of issuing an FPO before deciding whether or not to invest in the company's future. Aside from these, you'll need a reputable broker like Samco who can provide unbiased advice on IPOs and FPOs. Samco also offers a solid trading platform through which you can apply for IPOs without having to fill out any paperwork.