Many early-stage companies need consistent access to capital to invest in growing the business, to fund long-term projects, or for R&D. Over the past few decades, alternate modes of funding have evolved to help public companies raise money more expeditiously. One mode of funding is at-the-market (ATM) financing, which emerged in the 1980s with utility companies looking to raise capital on an ongoing basis. From that time on, companies in a broader range of industries, both large cap and small cap, started using it, and when the market dropped in 2008, the number of companies seeking funding through ATMs rose significantly.
Today, many public-company CFOs and CEOs, especially in biotech/life sciences, consider an ATM financing part of their capital-raising arsenal. When deciding on whether or not to put an ATM in place, it is important to understand how an ATM functions, and the pros and cons.
What is ATM financing?
Here’s how it works: your company must have an active shelf registration statement; you designate a broker-dealer to sell newly issued shares into the market at the current price; you and your broker-dealer monitor the activity in your stock, and when the time is right, you instruct your broker-dealer to sell a specified amount of new primary shares in the open market. You then receive the proceeds.
What are the advantages?
ATMs have the following advantages:
- Minimal market impact – Issuers can quickly raise capital by selling newly issued shares into the natural trading flow of the market, without having to market or announce sales. These shares can be strategically sold into the market, potentially without having an impact on the issuer’s stock price. Given that the timing of any particular takedown is unknown, investors tend not to short the issuer’s stock in advance of the offering.
- Flexibility and control – Issuers have full discretionary control over the timing, size, and price, including the limit price and size limitation of daily trading volume. This allows company to take rapidly take advantage of share price spikes following good news.
- Low cost – The distribution costs for at-the-market offerings typically are less than the costs of traditional follow-on offerings.
- Minimal management involvement – At-the-market offerings require no road shows.
What are the disadvantages?
Potential shortcomings of an ATM to consider include:
- Offering size – Since the offering size is limited by liquidity in the stock, ATMs are less useful to issuers seeking to raise a large amount of capital in a single tranche. You can typically only sell 15 to 30 percent of the average daily trading volume.
- Pricing – The price of an at-the-market offering depends on market pricing and is not fixed, while the cost of raising capital may fluctuate as the market fluctuates. In addition, the ATM may put a “cap” on the company’s shares, as institutional investors might hesitate to buy shares during low liquidity periods, knowing that the company is likely to sell shares on high-volume days following “good” news.
- Timing – At-the-market offerings are still registered offerings, and there will be periods during each quarter that the company cannot issue shares due to earnings, announcements and 10-Q/10-K filings.
- Marketing – Caution must be taken in non-deal marketing efforts because an active offering program is in place.
When should a company consider an ATM?
In general, companies in need of ongoing small capital investments for an extended period of time may want to consider an ATM. This could include a biotech company developing a novel drug or a medical technology company that is growing quickly and needs to invest in sales and marketing talent.
Despite the advantages of an ATM, in a market environment as strong as the current one, companies are often finding it more attractive to raise a large amount of capital at one time rather than in small pieces through an ATM.
For more insight on whether ATMs are a viable option for your company, or to talk through other funding possibilities, Westwicke can help. Contact us to start the conversation. Also listen to the replay of our latest Wall Street Revealed webinar, “How Does the Sell-Side Really Look at Companies.”