In the world of equities and public trading, several methods allow companies to generate capital. Although Initial Public Offering (IPO) and debt funding are among the most prevalent means, today, we are centering our focus on a unique yet increasingly prevalent funding approach among public companies: the At-the-Market (ATM) offering.
The ATM offering, also known as the controlled equity offering, is a funding strategy that allows publicly-traded companies to raise capital incrementally over time. Unlike traditional equity offerings, which involve a massive, one-time release of shares, the ATM offering allows companies to sell newly issued stocks directly into the market through a designated broker-dealer. Essentially, with this approach, a company has the liberty to control the timing, amount, and minimum price of shares sold to optimize its financing outcomes.
So, how does an ATM offering work? The process is simple but strategic. A public company enters into a sales agreement with a designated broker-dealer. This broker-dealer, often an investment bank, then sells the company’s shares into the secondary market at prevailing market prices. The company has the discretion to dictate the timing (which can be sporadic, regular or strategic depending on market conditions), amount (dictating the exact number of shares sold), and minimum price for shares.
One of the key merits of ATM offerings, drawing more and more companies towards this strategy, is the cost-effectiveness. Compared to traditional equity offerings, which often carry hefty underwriting fees and discounts, ATM offerings are typically executed at a significantly lower cost. As shares are sold directly into the secondary market at the prevailing price, there’s no need for underwriting discounts. Moreover, the legal and accounting fees for ATM offerings tend to be considerably less. Thus, the overall cost of accessing capital through an ATM offering is usually lower.
Further, the ATM offering provides a high level of flexibility not always found in traditional funding routes. A company can choose to pause or resume its ATM offering based on fluctuating market conditions and its funding needs. If the market price is unfavorable, the company can wait until conditions improve; on the other hand, if a funding need arises, the company can quickly generate capital without the need for new underwriting or regulatory processes.
Visibility, transparency, and market favor are also notable benefits of opting for ATM offerings. As the transactions occur openly in the market, investor perceptions are less likely to be negatively impacted. Unlike traditional equity offerings, which often lead to stock price depressions due to perceived dilution, ATM offerings can avoid sudden price depressions and negative investor reactions. This is primarily due to how they are integrated with routine market trading and are not as easily identified as dilutive transactions by the general public.
Additionally, ATM offerings can be a faster and more efficient means compared to conventional public equity offerings. Oftentimes, once the agreement between the company and the broker-dealer is disclosed to the public through a prospectus supplement filing, shares can be sold almost immediately, thus providing the company quick access to capital.
However, despite these advantages, ATM offerings do hold certain limitations. Firstly, they may not be suitable for companies seeking to raise large sums of capital in a single transaction. Also, while the overall cost might be lower, the commission rates for broker-dealers in the ATM offering are typically higher than that of a standard equity offering.
Delving deeper, shareholders may perceive ATM offerings as exploitative due to their dilutive nature. While the subtle execution of ATM offerings may reduce this risk, it does not completely eliminate it. Furthermore, as shares are offered at the prevailing market price, the company may not always fetch a premium price for the shares, and could potentially risk undervaluing its equity.
In conclusion, while the ATM offering presents an innovative and flexible funding approach, its suitability varies depending on the financial needs, market positioning, and strategic goals of the company. As such, companies ought to weigh the potential advantages and limitations adequately before opting for an ATM offering as their financing route.