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) serves as an important tool for companies that have already undergone the initial public offering phase. This dynamic capital-raising mechanism allows issuers to strengthen their market positions, acquire funds for business scaling, and enhance the liquidity of their shares. Unlike a Secondary Public Offering (SPO), where shares are sold by existing holders, an FPO involves the issuance of new securities. Understanding the intricacies of these two mechanisms is crucial for both company executives and investors looking to optimize their portfolios and assess risks. This article thoroughly explores key concepts, stages, regulatory requirements, effects on pricing and liquidity, as well as practical examples of successful and unsuccessful offerings.

1. Concept and Mechanism of FPO

1.1 What is FPO and How Does It Work?

A Follow-on Public Offering (FPO) is an additional issuance of shares by an already publicly traded company to attract fresh capital. In the process of an FPO, the issuer increases the number of shares in circulation, allowing the raised funds to be allocated to strategic projects such as expanding production capacity, research and development, mergers, and acquisitions. For investors, an FPO offers an opportunity to enter a promising company at a later stage of growth; however, it is accompanied by the risk of dilution of their holdings. This mechanism helps to balance the capital structure and improve financial metrics without resorting to debt financing.

1.2 Stages of Conducting an FPO

1. Decision by the Board of Directors. The board approves the size of the offering and the strategic goals for the raised funds.
2. Preparation of the prospectus. Lawyers and financial advisors compile a detailed document disclosing financial metrics, business models, and risks.
3. Regulatory approval. Each jurisdiction requires obtaining approval from the regulatory body: in Russia - from the Central Bank, in the USA - from the SEC, in Europe - from ESMA or national authorities.
4. Selecting underwriters and organizing book building. Investment banks gather bids, determine the optimal price, and assess the interest of different groups of investors.
5. Pricing and allocation. The offering is allocated among market participants at a set price, shares begin trading on the exchange, and the issuer receives the proceeds.
6. Post-marketing support. Underwriters provide price stabilization through market-making and consulting for the issuer.
7. Performance evaluation. The issuer analyzes the results of the offering, the volume of bids, 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 shares of the issuer.

2.2 Strategic Goals

FPO is used for financing growth, whereas SPO serves for monetizing shares of existing holders without bringing new funds onto the company's balance sheet. The choice depends on the objectives: expanding production and development - FPO; paying out to investors and rebalance assets - SPO.

2.3 When to Choose FPO vs. SPO?

If a company requires investment for a new project or merger, it typically opts for FPO. When key shareholders want to partially exit the business or restructure their portfolios, SPO is the choice. Furthermore, markets react differently: major SPOs are often viewed as a signal of insider dissatisfaction, while FPOs are perceived as a sign of growth.

3. Risks and Benefits of FPO

3.1 Benefits for the Issuer

FPO allows for obtaining debt-free capital, improving financial ratios due to the influx of funds, and increasing share liquidity, which reduces the spread and enhances attractiveness for institutional investors. The use of funds is directed towards strategic initiatives: expanding production, innovation, competitor acquisition, and developing new markets.

3.2 Risks for Shareholders

For existing shareholders, the primary risk is dilution of shares, which reduces their percentage of equity. A short-term offering of a large volume may exert downward pressure on price, especially if demand is insufficient. Additionally, poor communication with the market can create a negative signaling effect, where market participants interpret FPO as a sign of problems for the issuer.

4. Regulation and Requirements

4.1 International Standards

In all developed jurisdictions, issuers are required to prepare a prospectus, undergo the approval process with the national regulator (SEC in the USA, ESMA and national authorities in the EU, Central Bank in Russia), and comply with disclosure requirements for financial information. Additionally, in some countries, approval from the stock exchange and obtaining opinions from independent auditors are required.

4.2 Key Documents and Disclosures

The prospectus must include:

• Financial statements for the last three years and projections for the next three years.
• Description of the business model, growth strategy, and plans for the use of funds.
• Risks, including macroeconomic, industry, and operational risks.
• Ownership structure, connections with insiders and beneficial owners.

5. Participants in the Process

5.1 Role of Underwriters

Underwriters advise the issuer at all stages: from preparing the prospectus to supporting the price post-offering. They form the book of bids (book building), select the optimal price, and ensure guaranteed volumes of placement, taking on some of the risk.

5.2 Institutional and Retail Investors

Institutional investors (funds, pension funds, insurance companies) account for the majority of bids, providing stable demand. Retail investors create additional liquidity through small but numerous bids, increasing overall market engagement. Companies conduct roadshows and webinars to elaborate on all aspects of the offering.

6. The Impact of FPO on Price and Liquidity

6.1 Effect on Market Price

An additional share offering typically leads to a short-term decrease in price, especially if the volume of FPO exceeds 10–15% of free float. However, effective marketing support and strong demand can quickly restore prices and even elevate them if investors see growth potential.

6.2 Trading Volume Dynamics

Following a successful FPO, trading volumes often increase 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 motivate employees, strengthening its position in Asian markets and investing in cloud service development.
• Zoom Video Communications (2020): raised $1.5 billion, increasing investments in infrastructure and R&D, which ensured stable platform operations amid a sharp rise in users during the pandemic.

7.2 Mistakes in Conducting FPO

The most common mistakes in FPO are related to:

• Underestimating demand: aggressive pricing leads to the loss of potential capital.
• Poor communication: a lack of detailed project presentations reduces investor confidence.
• Excessive issuance volume: significant dilution of shares dissuades long-term shareholders.

7.3 Recommendations for Effective FPO

Companies contemplating an FPO should:

• Conduct a thorough market analysis and demand modeling.
• Organize a roadshow for different categories of investors.
• Ensure transparent and regular communication post-offering.
• Work with multiple underwriters to diversify risk.