Capital Raises by ATM Equity Offerings, Combined with Good Stewardship, Can Serve Companies and Investors
An at-the-market (ATM) offering is a type of follow-on offering of stock used by publicly traded companies to raise capital over time. Under a typical ATM offering program, a listed company incrementally sells newly issued shares on the exchange through a designated broker-dealer at prevailing market prices rather than employing a traditional underwritten offering at a fixed price.
According to Bloomberg Law, 79 ATMs were completed in the first quarter of 2020 representing proceeds of $10.1 billion. In 2019, 266 ATM offerings raised over $31 billion. The chart below summarizes ATM offerings on U.S. Exchanges from 2014 through the first quarter of 2020.
Advantages:
Greater control – A company has more control over the timing of sales, the amount and the price received. Additionally, a company can more precisely match the sources and uses of funds.
Less disruptive to the stock price – Unlike a managed public offering, ATMs are less disruptive to the stock price because sales are limited to a specific percentage of trading volume and mask the seller. Additionally, selling shares into the existing trading market can result in a lower cost of capital relative to other financing alternatives where the shares are sold at a discount.
Can be set up quickly – Generally, ATM offering programs can be implemented in relatively quickly for issuers that are eligible to use a short form S-3 registration statement and have an effective shelf registration statement.
Disadvantages:
ATMs may be used indiscriminately – Given their ease, managements may use ATM offerings to raise capital indiscriminately and cause dilution to existing shareholders.
Investors may be unaware – Unlike a public offering that may be more visible to investors, shareholders need to pay attention to filings, such as the Form 10-Q, to be aware of the company’s intention to use an ATM offering program and to track shares issued under the program.
Not suited for lump sum capital raises – Because sales are limited to s certain percentage of daily trading volume, ATMs are best suited for raising capital over time and not suited for raising large amounts of capital in a short time frame.
The Take-Away
ATM programs can be an effective tool for management to use for managing working capital needs and raising capital in advance to fund specific capital projects. However, management teams should use ATM programs effectively and efficiently to avoid unnecessary shareholder dilution. Investors should also pay attention to company filings to monitor such programs and assess whether management teams are good stewards of capital.
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Sources:
At the Market Offerings Raising Equity Capital in Volatile Markets, Goodwin Law, December 29, 2008.
Analysis:
At-the-Market Offerings Trend Upward in Q1 2020, Bloomberg Law, Preston Brewer, April 10, 2020.
At-the-Market
Offerings, Journal of Financial and Quantitative Analysis, Vol. 54, No. 3, Matthew T. Billett, Ioannis V. Floros, and Jon A. Garfinkel, June 2019.