What is an At-The-Market Offering?

What is an at-the-market offering, (A.T.M) or “dribble out” offering?

By:U. Smokey

When a publicly traded company is in the need to raise capital they have a few options at their disposal. Of course they can chose the way of debt and interest payments by simply going to a bank and taking out an interest bearing loan. Or they can use a very unique tool that only publicly traded companies have at their disposal, and that is to raise capital by way of the stock market. That is what the market is for after all, for companies to raise capital to continue to develop and grow over time. But this so called “Free Money” doesn’t come without a cost, and that is the cost of dilution and loss of value to the share price of the company which could make the company look less interesting to institutional and retail investors. Not to mention in many cases gives the banks and institutions that sell the company short a cheap and easy way to close out any short positions at max profits. There are a few types of offerings that can be done if a company does need to seek capitol by way of the make, but might I suggest an At-The-Market Offering, and here is why…

An A.T.M. offering is a form of a follow-on public offering when a shelf offering is already in place. It's a way for a company to raise capital by offering securities at a fixed market bid price only instead of it being a “bullet offering” or single offering, an ATM can be spread out over time, at various bid prices in a more controlled environment. When shares are introduced to the market, they are distributed in blocks so not to disrupt the trade flow this is also called a dribble out offering because of these characteristics.

The ATM offering gives the company or issuer the ability to set specific parameters to the shared distribution process. Normally, in a follow-on offering, shares are sold all at once through a large number of pre-selected broker dealers at a specific price according to investor demand at any one point in time. In an ATM offering the issuer or company gets to tell the agents or underwriters more formal details like prices the securities are to be sold at, the length of time the individual issuance can last, even the amount of volume that can be issued at one time.

For example:

if the average volume of any security is 5 million shares daily then the company can say to the underwriters, they want no more than 10% of the average daily volume introduced into the market in one day and it cannot be sold for less than $1 per share and you have two weeks to introduce all of the shares into the market for any offering amount given. The broker may have been instructed to introduce 3 million shares, but they can introduce no more than 500,000 shares in a single day due to the 10% rule set by the company and they can only do it when the price is at a dollar or better.

This benefits the retail investors as well as the company because not introducing large numbers of shares at one time, and doing it in blocks, does not change the natural flow of trading and creates minimal market impact. The reason it doesn't affect the overall flow of the market is because they do not have to make a public announcement every time they introduce a chunk of shares into the market. The Prospectus supplement that's provided is the only announcement that will be given In regards to the multiple offerings that could take place, until either the quarterly financial statements, where they will explain any shared distribution that was done, or once the ATM offering is complete. By not having to announce every time there is a distribution it reduces the FUD that is associated with dilution.

Another benefit to the company when doing an ATM offering is flexibility. What I mean by that is if they come across another acquisition or takeover candidate they have the ability to pounce and use shares from the ATM offering to make part or all of the purchase price of the potential acquisition without the need for secondary financing from a bank. That means the company has the ability to continue to expand, grow, and make strategic acquisitions without creating interest bearing debt going through a large bank. It also gives the issuer or company the ability to have more meaningful discussions with strategic investors like international investing firms or even governments to be able to gain non-dilutive capital… Yes! You heard that right, I said NON-dilutive capital but we'll talk about that a little bit later…

There is also a cost benefit to an ATM offering. typically in a standard follow on offering it costs upwards of 6 to 10% of the overall adjusted value of the offering, which that money goes to the underwriters as basically costs of doing business to make the offering happen. And remember that's for a one-time service being done. With an ATM offering the cost to do the offering charged by the underwriters it's significantly less and usually only 1 to 3% of the offering total which in turn saves the issuer money on having to pay fees to the underwriters, even though the underwriters essentially are doing far more work in the end. Speaking of more hands being involved, there's also more banks involved in the offering process. When a company wants to perform an ATM offering they need the banks to basically audit the company and do all kinds of legal due diligence like digging into the companies financials, patient information, contracts, the works! Things the average retail investor is not privy to. They do this to be able to better be able to place shares in the appropriate long-term investors as well as ensure the companies are on the up and up. This also gives the ability for those banks to initiate new research coverage on the company as well as brings a larger retail audience through their coverage as well as those banks will want to bring the retail investors additional value.

Now back to that non-dilutive capital… Now that we know that there's more banks involved, and they are doing due diligence on the company, this creates a potential larger audience. and that larger audience could be both governmental and non-governmental entities, which could open the doors to various grants, crowdfunding, tax credits, and even form structured equity products. For governments to be able to give grants to a company, they need to see that the company has the ability to raise capital at any time and an A.T.M. offering does exactly that. This kind of capital raising is the best form of capital raising because it allows for the company to be able to do their day-to-day business and even in many cases grow the business even stronger than before because they have the backing of multiple investors and governments that want to see the success of the company. And essentially could make it so the company may not even need to use any remaining offerings left on the shelf.

Hopefully this description of the at the market offering Can help you better understand The benefits and process of this type of offering and why a company chooses to go this route instead of a direct follow-on offering. And I hope you will see how this can also be beneficial to the retail investor, and how a company that perform this type of offering is merely trying to bring value to each shareholder while at the same time is able to help the company grow and succeed.

Written by: Matthew Brubaker

Aka Uncle Smokey