Debt & Equity Offerings

Follow-On Equity Offerings

After a company has completed its IPO and is publicly traded, it may return to the capital markets to raise additional equity through a follow-on offering (also called a "secondary offering" or "seasoned equity offering"). Follow-on offerings are a significant part of investment banking activity and are heavily tested on the Series 79 exam. Understanding the different types, structures, and regulatory considerations is essential.

Follow-on offerings come in several forms, each with distinct characteristics and implications for the issuer and its existing shareholders:

Primary Offerings

In a primary follow-on offering, the company issues and sells new shares. The proceeds go to the company and can be used for general corporate purposes, acquisitions, debt reduction, or capital investments. Primary offerings are dilutive to existing shareholders because they increase the total number of shares outstanding, reducing each existing shareholder's percentage ownership of the company.

Secondary Offerings

In a secondary offering, existing shareholders (such as founders, executives, venture capital firms, or private equity sponsors) sell their shares. The proceeds go to the selling shareholders, not the company. Secondary offerings are not dilutive in terms of share count (no new shares are created), but they may create selling pressure that affects the stock price. Large secondary offerings, particularly by significant shareholders, may signal a lack of confidence in the company's future prospects.

Combined Offerings

Many follow-on offerings are a combination of primary and secondary components, where the company issues some new shares and existing shareholders sell some of their holdings simultaneously.

Bought Deals and Accelerated Bookbuild Offerings (ABOs)

For well-known, liquid issuers, the follow-on process can be significantly accelerated compared to an IPO. In a bought deal, the underwriter purchases the entire offering from the issuer at a fixed price and then resells the shares to investors. This provides price certainty to the issuer but shifts the market risk entirely to the underwriter. In an accelerated bookbuild (ABO), the underwriter markets the offering to institutional investors over a very short period (often overnight), building an order book and pricing the deal within hours rather than weeks.

Shelf Registration and Well-Known Seasoned Issuers

Shelf registration under SEC Rule 415 is one of the most important tools for established issuers accessing the capital markets. It allows a company to register a large amount of securities with the SEC and then sell them in portions over time as market conditions permit. The "shelf" metaphor refers to putting the registration on the shelf and taking it down when needed.

A Well-Known Seasoned Issuer (WKSI) receives the most favorable treatment under shelf registration rules. A WKSI is a company that has been reporting with the SEC for at least 12 months and has either a public float of $700 million or more or has issued at least $1 billion in non-convertible securities in the past three years. WKSIs enjoy automatic shelf registration effectiveness (no SEC review delay), the ability to add new securities classes without a new filing, and pay-as-you-go registration fees.

For companies that are not WKSIs but still qualify for short-form registration (Form S-3), shelf registration is available but with somewhat less flexibility. Form S-3 eligibility requires the issuer to have been reporting for at least 12 months, to be current in its filings, and to have a public float of at least $75 million (for primary offerings).

Private Placements

Private placements are offerings of securities that are exempt from SEC registration requirements. They are a significant source of capital for both public and private companies and represent a substantial portion of investment banking activity. The key regulatory frameworks for private placements include:

Regulation D

Regulation D provides the most commonly used exemptions from registration for private placements in the United States:

• Rule 506(b): Permits offerings to an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors. General solicitation and advertising are prohibited. This is the most widely used private placement exemption.
• Rule 506(c): Permits offerings using general solicitation and advertising, but all purchasers must be verified accredited investors. The issuer must take "reasonable steps" to verify accredited investor status.
• Rule 504: Permits offerings up to $10 million in a 12-month period with fewer restrictions, but availability varies by state.

Regulation S

Regulation S provides an exemption for offerings made outside the United States to non-U.S. persons. The exemption requires that the offer and sale occur in an "offshore transaction" with no "directed selling efforts" in the United States. Regulation S offerings are subject to restrictions on "flowback" (resale to U.S. persons) during a distribution compliance period of 40 days (for equity) or longer for certain securities.

Rule 144A

Rule 144A provides a safe harbor exemption for the resale of restricted securities to Qualified Institutional Buyers (QIBs) — institutions that own and invest on a discretionary basis at least $100 million in securities. Rule 144A has become one of the most important mechanisms for capital raising because it allows rapid execution, avoids SEC registration requirements, and provides access to deep institutional liquidity. Many bond offerings are conducted as Rule 144A/Regulation S transactions, combining U.S. institutional and international distribution.

Debt Offerings

Debt capital markets (DCM) activity is a major component of investment banking. Companies issue debt securities to fund operations, acquisitions, refinance existing debt, and optimize their capital structure. Investment bankers advise on the structure, timing, pricing, and marketing of debt offerings.

Investment-Grade vs. High-Yield Debt

Investment-grade bonds are rated BBB-/Baa3 or higher by the major rating agencies (S&P, Moody's, Fitch). These bonds carry lower credit risk and offer lower yields. The investment-grade market is the largest segment of the corporate bond market and is primarily accessed by large, well-established companies.

High-yield bonds (also called "junk bonds" or "non-investment-grade" bonds) are rated BB+/Ba1 or below. These bonds carry higher credit risk but offer higher yields to compensate investors. The high-yield market is heavily used in leveraged buyouts, growth capital financing, and by companies with lower credit quality.

Convertible Securities

Convertible bonds are hybrid securities that combine features of debt and equity. They pay a fixed coupon like a regular bond but can be converted into a specified number of shares of the issuer's common stock at a predetermined conversion price. The conversion feature allows investors to participate in the upside of the issuer's equity while receiving downside protection through the bond's coupon and principal repayment. Convertibles typically carry lower coupon rates than straight debt because of the embedded equity option.

Leveraged Loans

Leveraged loans (also called "bank loans" or "senior secured loans") are floating-rate loans made to below-investment-grade borrowers, typically to fund LBOs, acquisitions, or recapitalizations. They are senior in the capital structure and secured by the borrower's assets. The leveraged loan market operates differently from the bond market: loans are syndicated by arranging banks to institutional investors (CLOs, loan funds, hedge funds) and typically include financial maintenance covenants.

PIPE Transactions and At-the-Market Offerings

Private Investment in Public Equity (PIPE)

A PIPE transaction involves a public company selling securities directly to a select group of investors in a private placement. PIPEs are typically structured under Regulation D and allow public companies to raise capital quickly without the time and expense of a registered public offering. Common PIPE structures include common stock at a discount to market, convertible preferred stock, or convertible debt. The issuer must subsequently file a resale registration statement to allow PIPE investors to sell their shares in the public market.

At-the-Market (ATM) Offerings

An ATM offering allows a public company to sell newly issued shares incrementally into the existing trading market at prevailing market prices. ATM programs are established under shelf registration statements and provide maximum flexibility, allowing the issuer to raise capital on an ongoing basis without fixed timing or pricing. The underwriter (acting as an agent) sells shares into the market over time, minimizing market impact. ATM offerings are particularly popular with REITs, utilities, and other capital-intensive businesses that have regular capital needs.

Rights Offerings

A rights offering gives existing shareholders the preemptive right to purchase newly issued shares in proportion to their existing holdings, typically at a discount to the current market price. Rights offerings protect existing shareholders from dilution by giving them the opportunity to maintain their proportional ownership. If a shareholder does not exercise their rights, they can typically sell them in the secondary market during the subscription period.