An At-The-Market offering is a continuous or periodic method of raising equity capital through the public sale of stock at market prices. Unlike traditional public offerings, which sell a large block of shares at a fixed price, ATM offerings allow companies to issue shares directly into the market whenever they choose, based on current market conditions.
Key Features
- Flexibility: Companies can choose when and how much stock to sell based on market conditions and their immediate capital needs.
- Market-Driven Pricing: Shares are sold at the prevailing market price, which means the pricing is dynamic and can change with the market conditions.
- Incremental Sales: Shares are sold in small quantities over time rather than in a single large transaction.
- Minimal Market Disruption: ATM offerings can reduce the risk of stock price dilution and volatility that might accompany larger public offerings.
How Does an At-The-Market Offering Work?
Process
- Establishing an ATM Program:
- The company files a shelf registration statement with the SEC, which allows it to issue new shares at any time within a certain period (usually up to three years).
- The company then enters into an agreement with a broker-dealer or an investment bank to facilitate the sale of shares.
- Selling Shares:
- The company can instruct the broker to sell shares at the prevailing market price whenever it deems appropriate.
- Shares are sold directly into the secondary market through stock exchanges, with the broker managing the sales.
- Raising Capital:
- Proceeds from the sale of shares go directly to the company, allowing it to raise capital as needed.
- The company can stop the ATM offering at any time or continue it until the desired capital is raised or the registration expires.
Example
Let’s say a company wants to raise $50 million through an ATM offering. Instead of selling all shares at once, it may sell small batches of stock over several weeks or months. The number of shares sold each day depends on market demand and pricing.
Benefits of At-The-Market Offerings
- Flexibility: Companies have the ability to take advantage of favorable market conditions and raise capital as needed without being locked into a fixed price or schedule.
- Reduced Dilution: Selling shares gradually can minimize the impact on existing shareholders, as the stock is sold at current market prices rather than at a potentially discounted rate.
- Cost-Effectiveness: ATM offerings often involve lower underwriting fees and costs compared to traditional equity offerings.
- Market Timing: Companies can strategically time sales to coincide with positive news or favorable market trends, potentially maximizing the offering’s value.
- Increased Liquidity: The gradual sale of shares can increase trading volume and liquidity, potentially attracting more investors.
Drawbacks of At-The-Market Offerings
- Market Risk: The company’s stock price may be affected by broader market conditions, potentially impacting the amount of capital raised.
- Uncertain Proceeds: Since shares are sold at market prices, the total capital raised may vary, depending on stock performance and demand.
- Perception Issues: Investors may perceive frequent ATM offerings as a sign of financial distress or an inability to secure other forms of financing, which could negatively affect investor sentiment.
- Dilution Risk: Although gradual, the issuance of new shares still results in dilution of existing shareholders’ ownership percentages.
Use Cases for At-The-Market Offerings
ATM offerings are commonly used by:
- Biotechnology and Pharmaceutical Companies: These firms often need capital for research and development, and ATM offerings provide a way to raise funds without waiting for milestone events.
- Real Estate Investment Trusts (REITs): REITs use ATM offerings to raise capital for property acquisitions, development, or paying down debt.
- Utilities and Energy Companies: These companies might use ATM offerings to finance infrastructure projects or expansion initiatives.
- Startups and Growing Companies: Firms seeking growth capital without undergoing a large-scale public offering might choose ATM offerings as a more flexible option.
Comparison with Other Offerings
At-The-Market Offering vs. Traditional Public Offering
| Feature | At-The-Market Offering | Traditional Public Offering |
|---|---|---|
| Pricing | Market-driven | Fixed price |
| Timing | Flexible, ongoing | Single event |
| Dilution | Gradual | Immediate |
| Underwriting Costs | Lower | Higher |
| Market Impact | Minimal | Potentially significant |
| Investor Perception | Neutral to cautious | Often positive |
At-The-Market Offering vs. Private Placement
| Feature | At-The-Market Offering | Private Placement |
|---|---|---|
| Investor Base | Public investors | Institutional or accredited |
| Disclosure Requirements | High (public filings) | Lower |
| Pricing | Market-driven | Negotiated |
| Timing | Continuous | One-time or staged |
| Costs | Lower | Higher |
Conclusion
At-The-Market offerings offer companies a flexible and efficient way to raise capital by selling shares at market prices over time. While they offer many advantages, such as reduced dilution and cost savings, they also come with risks like market volatility and uncertain proceeds. Understanding the strategic use of ATM offerings can help companies effectively manage their capital needs while considering investor perceptions and market conditions.
