• ATM Offerings -- Flexible, Opportunistic Access to Capital
  • October 25, 2010 | Authors: David M. Carter; W. Brinkley Dickerson; Mark Windon Jones; David I. Meyers; James J. Wheaton
  • Law Firms: Troutman Sanders LLP - Atlanta Office ; Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Virginia Beach Office
  • Many mid-sized and smaller public companies continue to find it difficult to raise equity capital on attractive terms.  Volatile markets, skittish investors and economic uncertainty have combined to decrease the number and length of windows of opportunity to tap the capital markets.  An “at-the-market,” or ATM, offering structure may help a listed company to maximize its opportunities by providing a platform for ongoing, incremental sales of equity on terms specified by the company. 

    Basics.  ATM offerings are registered, public offerings of newly-issued equity securities into a listed company’s existing trading market.  Sales are made incrementally over time by an agent in accordance with company instructions regarding offering price, size and timing.  A company can vary its offering parameters from week to week, day to day or even intraday in response to market trends and its own balance sheet needs.  Sales are made at the market price prevailing at the time of sale (but only when that price meets the company’s specified price terms).  Unlike an underwritten offering, a company is not obligated to sell any securities in an ATM offering, and may choose not to issue sales instructions to the agent at all. 

    Benefits.  ATM offerings provide issuers with control over offering terms and flexibility to alter those terms, permitting timely, opportunistic access to the capital markets.

    • Flexibility and control - the company sets, and can vary from time to time, offering price, size and timing parameters.
    • Does not limit offering options - generally, ATM offerings may be suspended to permit another underwritten or other offering.
    • Minimizes certain business risks - periodic sales of smaller increments of securities at the company’s discretion (i) minimize the effect of dilution, (ii) manage the pricing risk posed by an underwritten offering and (iii) avoid the reputational risk of a withdrawn or “downsized” underwritten offering.
    • Low transaction costs - agent fees for ATM offerings usually are lower than for other types of offerings, and fees are payable only with respect to securities that actually are sold.  In addition to lower monetary costs, ATM offerings impose less of a time burden on management, as they do not entail special selling efforts, such as road shows.
    • Minimal real-time disclosure of sales activity - in most instances, public disclosure will be limited to disclosure at the time of the initial SEC filing and quarterly disclosure of sales activity in periodic reports.

    Challenges.  While the ATM structure offers many benefits, the ongoing, incremental nature of sales under ATM offerings creates some challenges, as well.

    • Difficulty in raising large amounts - the incremental, periodic nature of sales and the absence of special selling efforts may make it difficult to raise a large amount of capital solely through an ATM offering, especially for issuers with smaller public floats or lower average trading volumes.
    • Possession of material nonpublic information - given the ongoing nature of ATM offerings, to avoid the violation of antifraud rules, companies need to implement standing controls to ensure they do not issue any sales orders or complete any sales while they have material nonpublic information.
    • Necessity of ongoing due diligence - agents in ATM offerings need to conduct due diligence efforts throughout the course of the offering.  Companies typically are required to provide a legal opinion, a comfort letter, an officer’s certificate and access to management at the time of the initial SEC filing and on a quarterly and case by case basis thereafter.  Companies may, however, be able to negotiate a suspension of diligence requirements during periods of planned inactivity.

    Eligibility.  A company must be eligible to use a Form S-3 registration statement (or Form F-3 for foreign private issuers) on a “primary” basis.  To meet the Form S-3 eligibility requirements, a company must (i) be organized and principally based in a jurisdiction in the United States, (ii) have been public for at least 12 calendar months, (iii) have timely filed all reports required under the Exchange Act in the 12 months prior to the filing of the Form S-3 (subject to certain exceptions) and (iv) not have failed to meet certain obligations with respect to preferred stock, debt obligations or long-term leases.  In addition, a company with less than $75 million in public float (x) must have a class of common equity listed on a national securities exchange (including Nasdaq), (y) may not be, or have been in the 12 months prior to the filing of the Form S-3, a shell company and (z) may not use Form S-3 to sell more than one-third of its public float in primary offerings in any 12 calendar months.