A follow-on offering (FPO), also referred to as a secondary offering, occurs when a public company issues additional shares after its initial public offering (IPO). This is typically done to raise capital for financing projects, paying off debt, or funding acquisitions.

When a company issues a follow-on offering, the shares must be available to the public, not offered to only existing shareholders. Additionally, the company must’ve already offered an IPO and be publicly listed on a stock exchange.

How Does a Follow-On Offering Work?

A follow-on offering involves a public company selling additional shares of stock to the general public. For example, if Company XYZ wants to raise money to start a new project, it would initiate a follow-on offering.

The process begins with the company hiring an investment bank to underwrite the offering, register it with the SEC, and manage the sale of the shares. The proceeds from the sale go directly to the company. Alternatively, follow-on offerings can also involve existing shareholders selling their shares to the public, in which case the seller—not the company—receives the proceeds.

Types of Follow-On Offerings

Diluted

A diluted follow-on offering occurs when a company issues new shares to raise capital. These additional shares increase the total number of outstanding shares, which dilutes the earnings per share (EPS). This dilution results from a larger denominator in the EPS calculation, thereby reducing the portion of earnings allocated to existing shareholders.

Non-Diluted

In a non-diluted follow-on offering, existing shareholders sell their shares to the public. Since no new shares are issued, the total number of outstanding shares remains unchanged, and the EPS is unaffected. The proceeds from the sale go to the selling shareholders rather than the company. Non-diluted offerings are also known as secondary market offerings.

Reasons to Issue a Follow-On Offering

Public companies issue follow-on offerings to raise equity capital for a variety of reasons, including:

Paying Down Debt: The proceeds can be used to reduce existing debt, especially if debt covenants are too restrictive on business operations.

Rebalancing Capital Structure: Companies may issue shares to adjust their debt-to-equity ratio and maintain a healthy capital structure.

Supplementing IPO Proceeds: If the IPO did not raise sufficient capital to meet the company’s growth objectives, a follow-on offering can provide additional funding.

Financing Growth Initiatives: Issuing shares may be preferable to increasing debt, as it avoids additional interest expenses and enables the company to fund new projects, acquisitions, or expansions.

Examples of Follow-On Offerings

In 2005, Google issued a follow-on offering of 14,159,265 shares of Class A common stock, which were sold at $295.00 per share.

In 2013, Facebook announced they would offer an additional 27,004,761 new shares. 42,995,239 existing shares were also being offered by shareholders, including 41,350,000 shares offered by its chief executive, Mark Zuckerberg. They intended to use the proceeds from the selling of shares to finance corporate operations and increase working capital.

Tesla also issued new shares several times following its initial public offering. They issued 5,300,000 new shares of common stock in 2011 and 4,344,930 new common shares in 2012. At the beginning of 2020, they announced an offering valued at $2 billion worth of stock. In December 2020, they announced another offering of $5 billion worth of stock.