Follow-on offering

A follow-on offering is any public sale of shares by a company after its IPO. It can be primary, where the company issues new shares to raise capital, secondary, where existing shareholders sell their stock, or a mix of both.

How it works

Most follow-ons are sold off an effective shelf registration, so the company files a short prospectus supplement under Rule 424(b) instead of a full new registration statement. Common formats:

• Overnight or bought deal: announced after the close, priced overnight, trading resumes the next morning at the new price
• Marketed deal: a short roadshow over one to a few days before pricing
• Confidentially marketed public offering (CMPO): the bank sounds out investors privately, then launches and prices quickly

Follow-ons are usually priced at a discount to the last close, often a few percent for large caps and much more for small caps, and often carry a greenshoe and a short lock-up.

Why it matters for traders

Primary follow-ons add shares and cause dilution, so stocks commonly drop toward the offering price on the announcement. The size of the discount and the use of proceeds matter: funding a late-stage trial or acquisition reads differently from plugging an operating gap. Biotechs often raise right after good data, when demand is strongest. Watch for after-hours announcements, the pricing press release the next morning and the prospectus supplement.

Example

Hypothetical Northwind Therapeutics (NWTX), with 50 million shares, closes at $25 after positive Phase 2 data. That evening it announces a $150 million offering and prices 6.67 million shares at $22.50, a 10% discount. The share count rises 13.3% to about 56.7 million, and NWTX opens at $23 the next morning.

FAQ

Why do stocks fall when a company announces an offering?

New shares dilute existing holders, and the offering is usually priced below the market, which pulls the stock toward the deal price.

Is a follow-on offering the same as a secondary offering?

The terms are often used interchangeably. Strictly, a secondary offering is a sale by existing holders, which does not add new shares.