Photographer: Austin Distel | Source: Unsplash
Publicly traded startups and emerging growth companies can choose many ways to raise additional capital. One of these methods is an at-the-market offering, or ATM offering. Whether a public company seeks to raise additional capital, repay debt, or fund a small acquisition, this enables it to offer securities into an existing trading market on an as-needed basis.
An ATM offering allows a publicly traded company to raise capital through the secondary trading market. The company can sell newly issued shares or existing shares incrementally on the secondary market. A broker-dealer facilitates the sales at prevailing market prices.
An ATM offering enables a company to control the timing and size of each sale of shares of its securities. Sometimes called an ATM equity program, it is a type of follow-on offering of stock.
Key Documents Involved
To conduct the offering, the company must a file shelf registration statement on Form S-3 with the Securities and Exchange Commission (SEC). The shelf registration statement specifies the aggregate dollar amount of shares that should be sold over time. It will also disclose the intended use of proceeds from the offered securities.
An ATM equity program is usually established to issue and sell shares of the company’s common stock. However, public companies sometimes conduct ATM programs to sell shares of preferred stock.
One key document is the sales agreement. It is established between the company conducting the ATM offering and the sales agent. Other terms for he sales agreement include equity distribution agreement, sales agency agreement, or open market sales agreement.
The sales agent is the investment bank that facilitates the issuance and sale of the company’s shares to third parties on the secondary market. Most ATM offerings are valued at under $100 million. Larger ATM offerings may involve multiple sales agents.
The Mechanics of an ATM Offering
Designated shares are issued and sold pursuant to the company’s shelf registration statement on Form S-3. The sales agent must use commercially reasonably efforts to sell the company’s shares. In return, the sales agent is entitled to a 1-3% commission fee.
Aside from the shelf registration statement and the sales agreement, several other documents are needed in an ATM equity program. These supporting documents include company resolutions, legal opinions, and auditor comfort letters.
Before an ATM equity program begins, proper due diligence must be conducted on the company. A bring-down diligence process helps avoid a lengthy waiting period. Since an ATM offering involves a publicly traded company, there is already disclosure available about the business and financial performance of the company. Therefore, the sales agent can confirm the information in the company’s public filings is accurate. The sales agent can also review new developments since the most recent public filings.
A company must meet eligibility criteria to file a shelf registration statement on Form S-3. This must happen prior to the offering. Specifically, the aggregate market value of the company’s common equity held by non-affiliates must be at least $75 million.
Companies that meet certain sophistication requirements may benefit from a more flexible registration process. Known as well-known seasoned issuers (WKSIs), these companies can clear SEC review and launch their ATM program faster. A WSKI is a company that has a market value of common equity held by non-affiliates of at least $700 million.
ATM equity programs are popular among underperforming companies or smaller-scale companies. Some startups that have recently conducted ATM offerings include Cortexyme, a clinical stage biopharmaceutical company, and Exela Technologies, a business process automation software company.
Forward Sale At-the-Market Offerings
The forward sales ATM offering is a variation on the traditional ATM offering that is gaining popularity. This structure incorporates a forward-sale option to the ATM program. This enables the company to lock in its current stock trading price and simultaneously defer the issuance of the shares until a future date. If a company believes the current stock trading price represents a favorable cost of capital, it may sell on a forward basis.
The bank, acting as the forward purchaser, would purchase a fixed number of the company’s shares at the current trading price. Like a traditional ATM offering, the sales agreement would govern the transaction terms.