A follow-on offering, also known as a secondary offering, is a process by which a publicly-traded company raises additional capital by issuing and selling more shares of stock. This is in contrast to an Initial Public Offering (IPO), which is the process by which a privately-held company first becomes publicly traded by issuing and selling shares to the public for the first time.
The main reason for a company to conduct a follow-on offering is to raise additional capital for the business. The company can use the proceeds from the sale of the additional shares for various purposes, such as funding research and development, expanding operations, making acquisitions, paying off debt, or returning capital to shareholders through a dividend or share buyback.
Follow-on offerings can be done through various forms such as a public offering or a private placement. Public offerings are registered with the Securities and Exchange Commission (SEC) and made available for purchase by the general public, while private placements are typically done with a smaller group of accredited investors.
In a follow-on offering, existing shareholders of the company will often see a dilution in the value of their shares due to the influx of new shares into the market, which can increase the supply of shares and decrease the demand. Therefore, the company should have a clear plan on how to use the funds and how it will positively impact the company’s growth and profitability to maintain or increase the value of the existing shareholders.
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