What Is a Follow-On Public Offer (FPO)?

Follow-On Public Offer (FPO) Explained

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A follow-on public offer is a way for a company that’s already public to raise additional capital by issuing new shares to the public. These offerings usually increase the total number of outstanding shares, which can dilute the company’s existing shares, potentially to the detriment of current shareholders.

In this article, you’ll learn what a follow-on public offer is, how it works, and why companies use it to raise capital.

Definition and Examples of Follow-On Public Offer

A follow-on public offer (FPO) is when a publicly traded company issues additional shares of stock after its initial public offering (IPO). Similar to an IPO, an FPO allows companies to raise additional capital needed to expand their operations, reduce debt, or any other purpose. However, a company must already be public to take part in an FPO.

FPOs aren’t an uncommon practice in the corporate world. Major tech companies such as Facebook, Google, and Tesla have issued follow-on offers over the past several decades to raise capital during their growth years.

One recent example of an FPO occurred in April 2021 when the company Upstart Holdings, Inc. filed a registration statement with the Securities and Exchange Commission. The company announced it was offering an additional 2,000,000 shares of common stock in a public offering, as well as an additional 300,000 as an optional purchase for the underwriters.

Before the FPO, Upstart had roughly 73.91 million shares outstanding. Because the company increased its outstanding shares by a relatively small number compared to the total number of shares outstanding, it wouldn’t have had a significant impact on each shareholder's stake in the company. However, increasing the number of shares does slightly dilute each existing share.

In its statement, Upstart announced it planned to use the capital raised in the FPO for general corporate purposes.

  • Alternate names: Follow-on offering, follow-on issue, follow-on share sale
  • Acronym: FPO

How Does a Follow-On Public Offer Work?

Going public allows a company to raise significant capital by offering public shares for investors to purchase. But in some situations, a company might find it needs to raise additional capital down the road. In that case, it would issue an FPO.

To issue an FPO, a company must meet a few requirements:

  • It must already be a publicly traded company.
  • The company must offer its newly issued shares to the general public, not just to its existing shareholders.

The process to raise funds in an FPO is lengthy and often involves creating a prospectus, waiting to receive interest, then allotting shares to investors. While it is a similar process to undergoing an IPO, a company can’t initiate an FPO without first being public.

Suppose clothing company XYZ went public in 2020 selling T-shirts. At the time of the IPO, the company registered 100 shares with the Securities and Exchange Commission (SEC). The company used the capital it raised to purchase new storefronts and hire additional staff.

But just one year later, clothing company XYZ finds it’s having a hard time keeping up with demand and needs to expand its manufacturing. To help finance this endeavor, the company decides to issue a follow-on offering, issuing another 100 shares of stock, and once again registering them with the SEC.

After the IPO, the company had just 100 shares, meaning each share was worth 1% ownership in the company. Now that it’s issued another 100 shares, each share represents 0.5% ownership in the company. That means that unless existing shareholders purchase new shares, they’ve lost some of their stake in the company.

An FPO is a type of secondary offering, which is any time shares are sold after the primary offer (or IPO). While an FPO is a secondary offering, each secondary offering is not an FPO.

Types of Follow-On Public Offer

There are two types of FPOs a company can issue: diluted and non-diluted.

Diluted FPO

A diluted FPO is when a company issues new shares of stock, therefore increasing the number of outstanding shares. Companies do this to raise additional capital. With this type of offering, all existing shares are diluted. 

Non-Diluted FPO

A non-diluted FPO is when a company doesn’t issue new shares of stock but instead, existing shareholders sell their shares in a public market. In the case of a non-diluted FPO, the proceeds of the sales go to the shareholders who are selling their shares rather than to the company itself. This means it does not result in additional shares for the company.

Alternatives to Follow-On Public Offer

An FPO is one strategy a public company can use to raise capital, but it’s not the only one. Another way companies can raise additional capital is through borrowing—either borrowing from a bank or by issuing bonds.

Borrowing has some pros and cons compared to issuing new shares. The advantage of borrowing is that the company doesn’t dilute its existing shares, which benefits existing shareholders. The downside is that a company has to pay interest on borrowed money, which ultimately makes the capital more expensive.

Follow-On Public Offer vs. Initial Public Offer

Follow-On Public Offer (FPO) Initial Public Offer (IPO)
The company is already public The company is going public for the first time
Companies use them to raise capital Companies use them to raise capital
Shares are often sold at a discount Shares are sold at a price determined through market research
Diluted vs. non-diluted shares Common vs. preferred shares
Less risk, since the company has already proven itself in the market More risk, since the company has yet to prove itself in the market

An initial public offering (IPO) is when a company issues shares to the public for the first time. Before an IPO, companies have been funded only by the owners and often a small number of investors. They go public, usually as a way of raising capital to expand their businesses.

While there are some similarities between an IPO and an FPO—in both cases, the company is issuing new shares for the public to purchase—there are some notable differences. The most obvious difference is that while an IPO is when a company goes public for the first time, a company issuing an FPO is already public.

Another difference is how companies price their shares during the IPO versus the FPO. In the case of the IPO, companies go through extensive market research to nail down the right price. In the case of an FPO, the new shares are often discounted compared to the current share price as a way to entice buyers.

A key difference between FPOs and IPOs is the risk factor associated with investing in each. According to the SEC, buying shares during or immediately after an IPO can be risky for investors. But in the case of an FPO, the company has already been public for some time, so investors can easily see its track record.

What It Means for Individual Investors

If a company you’re invested in has announced a follow-on offering, it’s worth paying attention to. FPOs often dilute existing shares, meaning each of your shares will represent a smaller percentage of ownership in the company. In the future, that could mean lower dividends if and when the company passes its profits along to shareholders.

On the other hand, a company you’ve been considering investing in issuing an FPO could be an excellent opportunity. Companies often issue their FPO shares at a discounted rate to entice buyers. In other words, the FPO could be an opportunity essentially to buy shares on sale.

Key Takeaways

  • A follow-up public offer (FPO) is when a company that’s already public issues additional shares of stock.
  • An FPO is a way for companies to raise additional capital without borrowing.
  • In an FPO, a company is likely to issue new shares, which can dilute the ownership and profits of all existing shares.
  • Shares in an FPO are often issued at a discount as a way to entice buyers, meaning investors can get them for less than the market rate.