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ATM Programs and Follow-on Offerings: How Companies Raise Capital After Going Public

What Is an ATM Program?

An At-the-Market (ATM) program is a type of equity distribution agreement that allows a publicly traded company to sell newly issued shares directly into the secondary trading market at prevailing market prices. Think of it as a company having a "tap" it can turn on and off to raise capital whenever market conditions are favorable.

Unlike traditional stock offerings where a company issues a large block of shares all at once, ATM programs enable companies to sell shares incrementally over time. The company works with an investment bank that acts as a sales agent, selling shares on the company's behalf through ordinary broker transactions on exchanges like the NYSE or NASDAQ.

How ATM Programs Work

The mechanics of an ATM program involve several key steps and participants:

1. Program Establishment

A company first files a shelf registration statement (typically Form S-3) with the SEC, which allows it to register a certain dollar amount of securities that can be sold over time. Within this shelf registration, the company establishes an ATM program by entering into an equity distribution agreement with one or more investment banks.

2. The Sales Process

Once the program is in place, here's how share sales typically work:

• Company Decision: Management decides when and how many shares to sell based on capital needs and market conditions
• Sales Instructions: The company provides specific instructions to the sales agent (investment bank) regarding the number of shares, minimum price, and timing
• Market Sales: The agent sells shares directly into the market through ordinary brokerage transactions
• Settlement: Proceeds from sales are transferred to the company, typically within 2 business days (T+2)

3. Disclosure Requirements

Companies must disclose ATM programs and sales through:

• Initial prospectus supplement filed with the SEC
• Quarterly updates in 10-Q filings showing shares sold and proceeds raised
• Form 8-K filings for material sales events

Understanding Follow-on Offerings

A follow-on offering (also called a secondary offering) is when an already-public company issues additional shares to raise capital. These come in two main varieties:

Types of Follow-on Offerings

1. Dilutive Follow-on Offerings

In a dilutive offering, the company creates and sells new shares, increasing the total shares outstanding. This dilutes existing shareholders' ownership percentage but raises fresh capital for the company.

2. Non-Dilutive Follow-on Offerings

In a non-dilutive offering, existing shareholders (often insiders or early investors) sell their shares. The company doesn't receive any proceeds, and the total shares outstanding doesn't change.

Traditional Follow-on Process

Traditional follow-on offerings typically follow this process:

1. Announcement: Company announces intention to raise capital
2. Underwriting: Investment banks form an underwriting syndicate
3. Pricing: Shares are priced, usually at a discount to current market price
4. Allocation: Shares are allocated to institutional investors
5. Trading: All shares enter the market simultaneously

ATM Programs vs. Traditional Follow-ons

Understanding the key differences between ATM programs and traditional follow-on offerings helps explain why companies might choose one over the other:

Advantages and Disadvantages

Advantages of ATM Programs

For Companies:

• Flexibility: Raise capital when needed without committing to a large offering
• Market Timing: Take advantage of favorable stock prices
• Lower Costs: Reduced investment banking fees compared to traditional offerings
• Less Disruption: Minimal impact on daily trading and stock price
• No Pricing Discount: Shares sold at market price, not at a discount

For Investors:

• Transparency: Regular disclosure of sales activity
• Gradual Dilution: Impact spread over time rather than all at once
• Market-Based Pricing: No artificial pricing pressure from large block sales

Disadvantages of ATM Programs

For Companies:

• Uncertainty: No guarantee of raising desired amount
• Market Dependency: Need favorable market conditions
• Volume Limitations: Can only sell limited shares without affecting price
• Time Required: May take weeks or months to raise target capital

For Investors:

• Ongoing Dilution Risk: Uncertainty about when shares will be sold
• Price Pressure: Potential overhang effect on stock price
• Information Asymmetry: Company knows when it's selling, investors don't

Market Impact and Stock Price Effects

Both ATM programs and follow-on offerings affect stock prices, but in different ways:

Immediate Effects

ATM Programs:

• Initial announcement may cause modest decline (2-5%)
• Daily selling typically absorbed by normal trading volume
• Price impact depends on selling rate relative to average volume

Traditional Follow-ons:

• Announcement often causes significant decline (5-15%)
• Pricing discount creates immediate dilution
• Large supply of shares can overwhelm demand

Long-term Effects

The long-term impact depends primarily on how the company uses the raised capital:

• Growth Investments: If capital funds profitable growth, dilution may be offset by increased company value
• Debt Reduction: Improving the balance sheet can reduce financial risk
• Working Capital: Supporting operations during growth phases
• R&D Funding: Particularly important for biotech and technology companies

Dilution Impact = New Shares / (Existing Shares + New Shares)

Example:
Existing Shares: 10 million
New ATM Shares: 1 million
Dilution = 1M / (10M + 1M) = 9.09%

Each existing shareholder's ownership decreases by 9.09%

How to Identify ATM Programs

Investors can identify and track ATM programs through several sources:

1. SEC Filings

Look for these key documents:

• Form S-3: Shelf registration statement establishing the program
• Prospectus Supplement: Details of the specific ATM agreement
• Form 10-Q: Quarterly reports showing shares sold and proceeds
• Form 8-K: Material events related to the program

2. Key Search Terms

When reviewing filings, look for:

• "At-the-Market" or "ATM"
• "Equity Distribution Agreement"
• "Sales Agreement"
• "Open Market Sale Agreement"
• "Controlled Equity Offering"

3. Company Announcements

Companies typically issue press releases when:

• Establishing a new ATM program
• Upsizing an existing program
• Completing a program

AG真人官方-World Examples

Understanding how companies actually use these programs helps illustrate their practical applications:

Example 1: Biotech Company ATM Program

Many biotech companies use ATM programs to fund clinical trials without the disruption of large offerings. They typically sell shares when:

• Stock price rises after positive trial data
• Market sentiment toward biotech improves
• Cash runway needs extending before next milestone

Example 2: REIT Follow-on Offering

AG真人官方 Estate Investment Trusts (REITs) frequently use follow-on offerings to fund property acquisitions. They often:

• Announce the property acquisition and offering simultaneously
• Price the offering to institutional investors
• Use proceeds immediately for the acquisition

Example 3: Growth Company Mixed Approach

Some growth companies use both methods:

• ATM program for ongoing working capital needs
• Traditional follow-on for major expansion or acquisition
• Choosing based on market conditions and capital requirements

What Investors Should Consider

When evaluating companies with ATM programs or planning follow-on offerings, consider these factors:

1. Use of Proceeds

Always examine what the company plans to do with the raised capital:

• Growth/Expansion: Generally positive if returns exceed cost of capital
• Debt Reduction: Can improve financial stability
• General Corporate Purposes: Vague and potentially concerning
• Working Capital: May indicate cash flow problems

2. Timing and Frequency

• Frequent ATM usage may indicate chronic capital needs
• Selling during price weakness suggests desperation
• Opportunistic selling at highs shows good capital management

3. Program Size Relative to Market Cap

Consider the dilution potential:

• Small (<5% of market cap): Minimal impact
• Moderate (5-15%): Noticeable but manageable
• Large (>15%): Significant dilution risk

4. Company's Track Record

Review the company's history with capital raises:

• How effectively have they used previous capital?
• Do they consistently need more money than projected?
• Have previous raises created shareholder value?

5. Industry Context

Some industries regularly require external capital:

• Biotech: Clinical trials and long development cycles
• REITs: Property acquisitions and development
• High-growth Tech: Rapid scaling and market expansion
• Capital-intensive Manufacturing: Factory and equipment investments

6. Market Conditions

Consider the broader market environment:

• Bull markets make capital raising easier and less dilutive
• Bear markets may force unfavorable terms
• Sector-specific sentiment affects reception of offerings
• Interest rate environment influences cost of capital alternatives

Red Flags to Watch

Frequently Asked Questions