Follow-on Public Offer (FPO): Definition and How It Works

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

A follow-on public offer (FPO) is when a company already listed on an exchange issues new shares to investors. The offer is an issuance of additional shares made by a company after an initial public offering (IPO).

Follow-on public offerings are also known as secondary offerings.

How a Follow-on Public Offer (FPO) Works

Public companies can also take advantage of an FPO through an offer document. FPOs should not be confused with IPOs, the initial public offering of equity to the public. FPOs are additional issues made after a company is established on an exchange.

Proceeds from the sale go to the company issuing the stock. Similar to an IPO, companies that want to execute a follow-on public offer must fill out U.S. Securities and Exchange Commission (SEC) documents.

Types of Follow-on Public Offers (FPOs)

There are two main types of follow-on public offers:

• The first is dilutive to investors, as the company’s board of directors agrees to increase the share float level or the number of shares available. This kind of follow-on public offering seeks to raise money to reduce debt or expand the business, resulting in an increase in the number of shares outstanding.
• The other type of follow-on public offer is non-dilutive. This approach is useful when directors or substantial shareholders sell off privately held shares.

Diluted Follow-on Offering

Diluted follow-on offerings happen when a company issues additional shares to raise funding and offer those shares to the public market. As the number of shares increases, the earnings per share (EPS) decrease.

The funds raised during an FPO are most frequently allocated to reduce debt or change a company’s capital structure. The infusion of cash is good for the long-term outlook of the company, and thus, is also good for its shares.

Non-Diluted Follow-on Offering

Non-diluted follow-on offerings happen when holders of existing, privately held shares bring previously issued shares to the public market for sale. Cash proceeds from non-diluted sales go directly to the shareholders placing the stock into the open market.

In many cases, these shareholders are company founders, members of the board of directors, or pre-IPO investors. Since no new shares are issued, the company’s EPS remains unchanged. Non-diluted follow-on offerings are also called secondary market offerings.

At-the-Market (ATM) Offering

An at-the-market (ATM) offering gives the issuing company the ability to raise capital as needed. If the company is not satisfied with the available price of shares on a given day, it can refrain from offering shares.

ATM offerings are sometimes referred to as controlled equity distributions because of their ability to sell shares into the secondary trading market at the current prevailing price.

Follow-on Public Offerings (FPO) in the Market

Follow-on offerings are common in the investment world. They provide an easy way for companies to raise equity that can be used for common purposes. Companies announcing secondary offerings may see their share price fall as a result. Shareholders often react negatively to secondary offerings because they dilute existing shares, and many are introduced below market prices.

Some companies that have completed follow-on public offerings in 2024 include Longboard Pharmaceuticals, with an issuance of 10 million shares valued at $210 million, and Cyngn, with an issuance of 19.8 million shares valued at $1.98 million.

The Bottom Line

A follow-on public offer (FPO) is a process through which a publicly traded company raises additional capital by issuing and selling new shares of its stock to the public via a stock exchange.

This is typically done when the company wants to fund new projects or expansions, pay off debt, or increase its working capital. There are two main types of FPOs, dilutive and non-dilutive. The shares are offered at a fixed price to the public through a book-building process, with the proceeds going directly to the company.

Existing shareholders may also participate in the FPO; either by purchasing additional shares or selling some of their existing ones. FPOs are a way for companies to tap into the capital markets and raise additional funds without taking on debt.