Traditional Offering

By Dennis McCarthy – (213) 222-8260 – dennis@mbsecurities.com

Welcome to the Equity Series – Raising Equity for Small Cap Public Companies. 

This particular video addresses one way for a company to use a shelf registration to raise equity through a traditional registered offering.

In the video on “Shelf Registration”, I said that in a shelf registration, typically, the company doesn’t initially specify (i) when it will offer the securities, (ii) what type of security it will offer, (iii) how much money it plans to raise, and (iv) which broker-dealer will be involved.

When a company is ready to sell securities in a traditional registered offering, the company will go ahead and specify those four items in a supplemental filing with the SEC which makes it publicly available information.

So, for example, a company would supplement its shelf registration with the SEC to specify that it planned to offer around $15 million in common stock through a broker-dealer, Monarch Bay, as soon as it completed a two-week roadshow to visit investors in several cities.

The major benefit of a traditional registered offering is that with those details now visible to the market, the offering company can market its offering to potential investors very publicly and widely.

To introduce its story to new investors, companies typically travel to major money center cities to visit potential investors in what’s known as a “deal roadshow” or may hold a big virtual roadshow conference call.

An offering is a great means to attract new investors because an offering presents an opportunity for a new investor to obtain a sizable block of securities which may not be readily available in the normal trading market, at least not without moving the price.

Also, salesmen at the broker-dealer involved in the offering can get a commission which is much larger than the commission from normal trading of public shares, so the salesmen are motivated to learn the company story and sell some shares.

All this offering activity should help the company’s trading after the offering too.

So what’s the downside of a traditional registered offering?

Well, because Wall Street knows that an offering is planned, it can put pressure on the stock price by selling the securities short hoping to buy the shares or cover the short position at a lower price.

Companies with low average trading volume are more vulnerable to this Wall Street maneuver.

As I said in my video “How to Get the Best Deal”, it’s key to raise equity before it’s absolutely necessary so the company can defer an offering if it gets too expensive due to shorting.  If investors think the offering is an absolute necessity and the company can’t delay, shorting could be a big problem.

So, the tradeoff is that with a traditional registered offering a company can reach out to new potential investors but this very visible public offering may attract Wall Street shorting and depress the stock price.

I don’t want to say that a traditional offering will always result in a drop in stock price because I’ve been involved in deals in which the stock price rose during the offering because new investors learned the company’s story and bought shares ahead of the offering in normal trading.

In other videos, I’ll describe mechanisms for registered offerings which don’t make it easy to short, such as an “Overnight Offering”.

Please contact me to help your company to raise equity or to complete other capital market projects.
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