Investing Word of the Day: Follow On Offering

Follow On Offering

We are used to hearing IPO or Initial Public Offering but just last week we heard of a new word which we thought was IPO.

STI is a well-known computer school in the Philippines but if you check STI in the Philippine Stock Exchange the name of the corporation is JTH Davies Holdings, Inc. which is the holding company of the brand STI and joint venture to better operate and manage PWU. JTH Davies Holdings, Inc. was incorporated way back 1946 and was listed on Oct 12, 1976 thus the recent public offering made by STI is not an IPO.

What then is a FOO or Follow On Offering?

Let us first make distinction between an IPO and a Secondary Offering. An IPO or Initial Public Offering of a company’s stock is the first time a corporation list its stock in a stock exchange. These stocks are stocks that are still unissued and outstanding. Offering a corporation’s stock in an IPO results into the public listing of the company. On the other hand a Secondary offering is an offering of the company’s stock that are already issued and only offered by the owner or shareholders to the public via the stock exchange to decrease their holdings in the company. In a way a secondary offering results into selling the stock to the secondary market and it does not result into a new listing since the company is already listed.

With that Follow On Offering is the offering of the unissued stocks of the listed company after its IPO. It does not result into the company being listed since it is already listed, it is not a secondary offering or selling to the secondary market since the stocks issued are still unissued as per company’s books.

For what reason a company makes an FOO?

Well just like an IPO a FOO results into raising capital for expansion or payment of debt purposes instead of borrowing. It will decrease the original shareholder’s percentage ownership because these are new issues of shares.

If you understand how a corporation is formed you would have a big picture why is there such things as an FOO. A corporation needs to set its number of authorized capital stock of which for it to be registered in the SEC it needs 25% of the authorized capital stock to be subscribed(meaning to be owned and to be paid) and of which 25% of that subscribed should be paid.  Upon fulfilling that such corporation can register and now exist and can operate its business even if its total capital is only 25% or 1/4 of that originally intended.

When a company decides to list its stock in a stock exchange they use the remaining unissued shares(if no one from the original incorporators or other people bought the remaining 75%) and thus the very first is called an IPO since it is first offered to the public. If the 75% remaining was not fully issued in an IPO, the remaining when offered will now be called an FOO.

Financial Freedom Advocate About the blogger

Louis Delos Angeles is a Certified Public Accountant, blogger behind Investing in Philippines, and author of Investing in Stocks: Preparing for the future small amount at a time. Learn more about Louis and his financial freedom advocacy here.

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