As an executive, you understand the importance of formulating a long term capital sourcing strategy that will provide you the cash necessary to support your company’s growth. You are constantly asked in investor meetings: “How much cash do you have on the balance sheet?” “How long will that last you?” So how do you prepare to ensure that your business remains well capitalized?
One of the most effective ways to execute a follow-on offering is off a shelf registration which allows for multiple stock offerings over time under one SEC filing. A lesser-known complement to the shelf registration is the at-the-market or ATM offering that can be registered as a component of your shelf registration statement. An ATM offering provides the opportunity to sell newly issued shares at market prices during the course of regular trading through a broker rather than all at once at one fixed price. As you establish your capital sourcing strategy, here are six points to consider regarding an ATM registration:
- ATM offerings provide flexibility. By allowing you to sell primary shares during the course of regular trading, the ATM adds another dimension to your capital sourcing strategy. This is especially true surrounding an event that might create additional demand for your shares, such as a data announcement, partnership agreement, or product approval. The volatility and increased trading volume generated around these types of events allow you to sell shares more quickly and at higher prices than would be possible with a fixed price offering at a discount to the closing price. The increased liquidity in this scenario facilitates the sale of primary shares with minimal market impact given they typically represent a small percentage of the overall daily trading volume in your issue.
- ATM offerings are lower cost than fixed price share offerings. The cost of an ATM offering is typically at a 1%-3% commission versus a 5%-7% commission for a marketed follow-on offering. Your ATM will rarely represent the majority of your capital sourcing strategy, but as opportunities arise to parcel out smaller amounts of primary shares at better prices than a fixed-share offering and at a lower rate, your overall cost of capital will decline over time.
- ATMs require minimal management involvement above normal investor interaction. We stress the importance of a good IR strategy that allows for efficient and effective investor meetings during non-deal road shows and at industry sell-side conferences. These meetings are important for face to face contact with existing shareholders, and are also an essential element to educate potential new investors on your story. An ATM can provide a vehicle for interested investors to a larger number of shares in your company than might be possible in the open market.
- Filing an ATM is good housekeeping. But remember, it is an option – and just because you have it does not mean you need to use it. You might never get the opportunity to deploy your ATM due to lack of liquidity or shares trading at levels where you do not want to sell stock. However, you never know when a situation out of your control – such as M&A headlines, positive data announcements, product approvals or technology endorsements with other companies within your field – might cause your shares to rise in sympathy to levels at which you do want to make sales. These scenarios tend to generate liquidity into which you can make sales with minimal market impact. Under these circumstances, it is nice to have the ability to take advantage of this demand.
- Do not let any concern of a share overhang deter you from filing an ATM. Every investor in high growth healthcare companies understands and expects the inevitable need for companies to raise additional capital to support future growth. While the notion of additional shares being sold can introduce an element of near-term technical pressure to share prices, it is the fundamentals of the growth story and the vision of management that will ultimately drive the long-term value creation. Technical considerations should not cloud your judgement when it comes to long-term capital requirement decision making.
- ATMs help to level the playing field with investors. I do not believe history has witnessed a growth company that has never encountered an adverse event that weighed on its share price. One hopes that such events never coincide with the need to raise capital, but in some cases they do – and in those instances, investors hold the upper hand in demanding conditions and pricing that is more favorable to them. Does an ATM registration allow you to avoid these situations? Maybe not entirely, but it very well could soften the blow by reducing the amount of capital needed in such a situation. It also gives you the upper hand to capitalize on favorable events when you have the advantage. Why not give your company that option?
Anticipating your long-term capital needs might seem like an easy exercise but unforeseen circumstances can throw a wrench into the best-laid plans. ATMs can help alleviate some of this uncertainty by allowing you to raise incremental capital during optimal market conditions and potentially postpone the need for a formal fixed offering that would come at a discount. The ATM can be a valuable component to your long-term capital sourcing strategy and adds an element of control and flexibility in the distribution of newly issued shares with a more favorable cost dynamic.
Check out our new eBook, Westwicke Insider’s Guide to Investor Relations, for comprehensive advice on every aspect of the IR process. And as you educate yourself and your board of directors, reach out for a conversation.
