What it is:
A follow-on offering, also called a sale of by a company or by an existing shareholder of a company that is already publicly held., is a
How it works/Example:
Let's say Company XYZ is a public company and would like to sell additional in order to raise to build a new factory. This sale of additional shares is called a follow-on offering. Company XYZ would hire an investment bank to underwrite the , register it with the SEC, and handle the sale. The company receives the proceeds from the sale of the shares.
Company XYZ is not the only entity that can effect a follow-on offering, however. Let's say you own a very large block of Company XYZ shares -- maybe 100,000 shares. In this type of follow-on offering, the seller -- which is not Company XYZ in this case -- receives the proceeds.
Why it matters:
Follow-on offerings can dilute existing shares considerably if the comes from the company because new are being created. Follow-on offerings from existing shareholders, however, do not dilute existing shares. Thus, it's important to know who the seller is.
In many cases, follow-on offerings from existing shareholders often involve founders or other managers (such as venture capitalists) selling all or a portion of their stakes in a company. This is often the case if the company's original IPO included a "lock-up" period during which the founding shareholders were not allowed to sell their shares. Follow-on offerings thus give these shareholders a way to their positions.
Regardless of the source, selling a large of shares all at once can exert downward pressure on the 's price -- a situation that is exacerbated when the is already thinly traded.