Over the weekend, we saw an article discussing the announcements by two more cannabis companies of “at-the-market” (ATM) stock offerings (link). As the article explains, an ATM offering (or program) allows a company to issue stock to buyers in small increments over time, rather than in one large transaction in, say, an underwritten offering. I thought this might be an opportunity to contrast further how an ATM offering differs from other ways public companies sell stock to investors, in order to highlight what makes this kind of offering unique.
Some of the more typical public stock offerings that we have seen from cannabis industry issuers include:
- Underwritten Offerings – an offering where an underwriter purchases the issuer’s stock for its own account and then tries to sell the stock to a group of investors, most typically with one closing. The underwriter takes the risk for its failure to sell the stock to investors; however, the underwriter will have already marketed the deal to investors before signing the underwriting agreement and becoming bound to buy the stock, effectively limiting the underwriter’s risk to a failure by an investor to send its money. At closing, these shares are typically available to be resold immediately by the investor.
- Bought Deals – these are similar to underwritten offerings, but differ in that the underwriter agrees to purchase the stock before marketing the deal to investors. This shifts more risk from the issuer to the underwriter, which is now committed to selling the stock prior to public announcement. To compensate for this risk, the underwriter will typically purchase the stock from the issuer in a bought deal at a much larger discount to market relative to an underwritten offering. At closing, these shares are typically available to be resold immediately by the investor.
- PIPEs –a “private investment in public equity”, this type of offering is done through a sale of newly-issued shares directly to a specific investor (or investors), with or without the involvement of an investment bank. PIPEs are typically done at a discount to the public trading price, in part because, due to laws limiting the resale of newly-issued stock (also known as registration), the buyer may not get prompt liquidity for the shares. PIPEs have the primary benefit of speed, since the shares are not registered for resale prior to the sale – registration for the investor to resell the shares typically occurs after closing.
- Registered Direct Offerings – these offerings do not include any sort of underwriter, meaning that no institution is agreeing before the transaction closes to purchase the stock, although a broker-dealer or investment bank is typically used. Similar to a PIPE, the issuer markets its shares directly to investors, but upon issuance, the shares are registered and may be immediately resolved by the buyers, so there is less of a discount.
ATM programs share some of the benefits of each of these other offerings. The shares are registered prior to sale under a “shelf” registration statement, so investors are buying stock that may be immediately resold. With the flexibility of the shelf registration statement, the shares may be sold over time by the issuer, in amounts and at prices as the issuer needs. Shares are sold at the market price (hence the name) by a broker-dealer agent, rather than at an investor discount, reducing the overall price impact (although, with more shares being issued, there is overall dilution).
However, not all issuers can take advantage of an ATM offering. In the United States, an issuer needs to be eligible to file a shelf registration in order to set up an ATM program, which is not available to all issuers. ATM offerings do not have the benefit of the speed of a PIPE offering to get to closing, are typically limited by market practice to smaller capital raises, and are subject to market price fluctuation over time, which could reduce demand.
It is worth noting that none of these are unique to cannabis – all public companies, whether they be banks or knish bakers, utilize these mechanisms to tap the public markets. What all of this boils down to is that there is no “one size fits all” approach for a public company raising additional equity capital.