Opportunities often arise from significant events that reshape the future of a company. The practice of event driven investing seeks to capitalize on these pivotal moments. One of the most critical events that creates opportunities is equity offering. But what is an equity offering, and why does it interest savvy investors?
What is an Equity Offering?
An equity offering is a method by which a company sells shares to raise capital. A share in a company represents fractional ownership, and this ownership stake is referred to as equity. When you own shares in a company, you own a portion of that company proportional to the number of shares you hold relative to the total number of shares outstanding. Many new investors might wonder, what is an equity offering and how it works. Here are the common equity offering processes:
Initial Public Offering (IPO) – When a private company decides to “go public” it offers its shares to the public for the first time. This process is called an initial public offering or IPO. This milestone event for most firms raises capital from public investors to be used to accelerate growth and for working capital.
Secondary Offering – In a secondary offering, existing shareholders sell their shares to the public. These shareholders could include early investors, company insiders, or even employees who were granted stock options. Though the company is not selling new shares, it may still play a role in facilitating the secondary offering. This can involve coordinating with investment banks to underwrite the sale ensuring regulatory compliance and managing communication with the market. The company does not raise any new capital from a secondary offering since it is not issuing new shares.
Researching what is an equity offering and how it can impact the value of your investment is worth the time invested.
Private Placement – A company may offer its shares (equity) privately to a select investor group, such as institutional investors or accredited investors. This type of equity offering is a private process meaning that it is not distributed through the public markets.
Rights Offering – A rights offering is a company extending an offer to its existing shareholders to purchase company shares at a discount before the shares are publicly offered. The dual advantage is the company raises capital and shareholders can maintain their ownership percentage by purchasing the discounted shares.
Follow-on Public Offering (FPO) – When a publicly traded firm issues additional shares and sells them in the open market, this is known as a follow-on public offering or FPO. The company can raise additional capital for growth and expansion, and debt reduction of working capital.
Before investing, it's crucial to understand what is an equity offering and how it might impact the value of your shares.
Key Considerations
Investor Considerations – Investors view equity offerings as buying opportunities but may have reservations about a potential adverse impact on the value of the company or a wariness concerning dilution.
Dilution – Existing shareholders can experience a decrease in their ownership percentage when new shares are issued. This is called dilution and can be mitigated by existing shareholders’ purchase of additional shares.
Capital Raise – Equity offerings are an effective process for companies to raise capital to make acquisitions or to plow back capital into the firm for growth pursuits.
Equity offerings are a valuable tool for companies to finance their operations and growth, but they also require careful consideration from both the issuing company and potential investors.
Read next: What is An Equity Sale?
