FPO and SPO: Differences

Follow-on Public Offering (FPO): A Comprehensive Guide and Comparison with Secondary Public Offering (SPO)

A Follow-on Public Offering (FPO) is a crucial tool for companies that have already undergone the initial public offering (IPO) stage. This dynamic mechanism for raising capital allows issuers to strengthen their market positions, acquire funds for business expansion, and enhance stock liquidity. Unlike a Secondary Public Offering (SPO), where existing shareholders sell shares, an FPO involves the issuance of new securities. Understanding the intricacies of these two mechanisms is essential for corporate executives as well as investors seeking to optimize their portfolios and assess risks. This article explores key concepts, stages, regulatory requirements, effects on price and liquidity, along with practical examples of successful and unsuccessful offerings.

1. Understanding the FPO Mechanism

1.1 What is an FPO and How Does it Work?

A Follow-on Public Offering (FPO) is an additional issuance of shares by an already public company aimed at attracting fresh capital. During the FPO process, the issuer increases the number of freely traded securities, allowing the proceeds to be directed towards strategic projects: expanding production capacities, research and development, mergers, and acquisitions. For investors, an FPO provides an opportunity to enter a promising company at a stage of further growth, although it carries the risk of dilution of ownership. This mechanism helps balance the capital structure and improve financial metrics without incurring debt.

1.2 Stages of Conducting an FPO

1. Board decision-making. The board approves the size of the issuance and the strategic objectives for the raised funds.
2. Preparation of the prospectus. Lawyers and financial advisors create a detailed document disclosing financial metrics, the business model, and associated risks.
3. Regulatory approval. In each jurisdiction, regulatory approval is necessary: in Canada, from the Ontario Securities Commission (OSC), in the U.S., from the SEC, and in Europe, from ESMA or national authorities.
4. Selection of underwriters and organization of book building. Investment banks gather orders, determining the optimal price and assessing the interest of various investor groups.
5. Pricing and issuance. The securities are issued to market participants at the established price, trading begins on the exchange, and the issuer receives proceeds.
6. Post-marketing support. Underwriters provide price stabilization through market making and consulting for the issuer.
7. Evaluation of results. The issuer analyzes the placement results, order volume, price dynamics, and prepares a report for shareholders.

2. Comparison of FPO and SPO

2.1 Definitions and Key Concepts

• FPO: Issuance of NEW shares to increase the company’s capital.
• SPO: Sale of EXISTING shares owned by insiders or funds without changing the total number of the issuer's shares.

2.2 Strategic Goals

An FPO is utilized for growth financing, while an SPO serves for monetization of existing shareholders' stakes without bringing new funds onto the company’s balance sheet. The choice depends on the objectives: to expand production and development—use FPO; to pay out to investors and rebalance assets—opt for SPO.

2.3 When to Choose FPO vs. SPO?

If a company requires investment for a new project or merger, FPO is preferred. Conversely, when key shareholders wish to partially exit the business or restructure portfolios, SPO is utilized. Furthermore, markets react differently: large SPOs are often seen as signals of insider dissatisfaction, while FPOs are perceived as indicators of growth.

3. Risks and Benefits of FPO

3.1 Benefits for Issuers

An FPO allows companies to gain debt-free capital, enhance financial ratios due to the influx of funds, and boost stock liquidity, thus reducing spreads and increasing attractiveness for institutional investors. The use of these funds is directed towards strategic initiatives: production expansion, innovation, competitor acquisitions, and market development.

3.2 Risks for Shareholders

For existing shareholders, the primary risk is dilution of ownership, which occurs when their percentage share in the capital decreases. A short-term offering of a large volume can exert downward pressure on price, especially if demand is insufficient. Additionally, poor communication with the market may create a negative signaling effect, leading market participants to interpret the FPO as an indication of issues faced by the issuer.

4. Regulation and Requirements

4.1 International Standards

In all developed jurisdictions, issuers are required to prepare a prospectus, undergo an approval process with the national regulator (the SEC in the U.S., ESMA and national authorities in the EU, the Bank of Canada—or provincial regulators—in Canada), and comply with financial information disclosure requirements. Additionally, some countries may require finalization with the exchange and obtaining opinions from independent auditors.

4.2 Key Documents and Disclosures

The prospectus must include:

• Financial statements from the past three years and projections for the next three years.
• Description of the business model, development strategy, and plans for fund utilization.
• Risks, including macroeconomic, industry, and operational risks.
• Ownership structure, relationships with insiders, and beneficiaries.

5. Participants in the Process

5.1 Role of Underwriters

Underwriters advise the issuer at all stages: from preparing the prospectus to price support after the offering. They create the book of orders (book building), select the optimal price, and ensure guaranteed placements by assuming part of the risk.

5.2 Institutional and Retail Investors

Institutional investors (funds, pension funds, insurance companies) contribute the majority of orders, ensuring stable demand. Retail investors provide additional liquidity through numerous smaller orders, increasing overall market engagement. Companies conduct roadshows and webinars to detail every aspect of the offering.

6. Impact of FPO on Price and Liquidity

6.1 Effect on Market Price

An additional share offering typically results in a short-term price decrease, particularly when the FPO volume exceeds 10-15% of free float. However, effective marketing support and robust demand can quickly restore shares to previous levels or even elevate them if investors see growth potential.

6.2 Trading Volume Dynamics

Following a successful FPO, trading volumes often rise by 20-50%, as the pool of shareholders expands. Increased market activity helps reduce volatility and improve the bid-ask spread, attracting new participants.

7. Practical Cases and Examples

7.1 Successful FPO Companies

• Alibaba Group (2019): raised $12.9 billion to expand its ecosystem and incentivize employees, solidifying its presence in Asian markets and investing in cloud services development.
• Zoom Video Communications (2020): raised $1.5 billion to increase investments in infrastructure and R&D, enabling stable platform operation amid a surge in users during the pandemic.

7.2 Common Mistakes in Conducting FPO

The most frequent mistakes during FPO are associated with:

• Underestimating demand: aggressive pricing can lead to a loss of potential capital.
• Poor communication: lack of a detailed project presentation diminishes investor confidence.
• Excessive issuance volume: significant dilution of stakes discourages long-term shareholders.

7.3 Recommendations for Effective FPO

Companies should before conducting an FPO:

• Conduct an in-depth market analysis and demand modeling.
• Organize roadshows for various categories of investors.
• Ensure transparent and regular communication post-offering.
• Work with multiple underwriters to diversify risk.