It can also be a secondary offering, reselling existing securities such as shares held by insiders at a company. Shelf offerings are cost-effective because companies don’t have to go through the full registration process every time they want to offer new securities. Shelf offerings can only be used by companies that are qualifying issuers. Qualifying issuers have:
Previously registered a class of securities for sale Filed all required financial reporting on a timely basis in the last 12 months Principal business operations in the U.S. Not defaulted on preferred stock dividends, debt, or lease installments
Some companies qualify as Well-Known Seasoned Issuers (WKSIs). The qualifications are either:
A worldwide market cap held by non-affiliates of $700 million or more, or Issuance in the last three years of at least a $1 billion aggregate principal amount of non-convertible securities, other than common equity, in primary offerings for cash. Non-convertible securities (such as non-convertible bonds, for example) don’t offer the option to convert into another security (such as common stock).
For example, a real estate company might file a shelf offering in anticipation of an improved housing market. Shelf offerings are also an effective way for companies to continuously bring new issues to market, possibly to support a dividend reinvestment program for shareholders.
How Shelf Offerings Work
A shelf offering begins with a shelf registration using U.S. Securities and Exchange Commission (SEC) Form S-3. The registration discloses the type of security for the future offering, common stock, debt securities, preferred stock, etc. The registration includes a base prospectus and a supplement to be used when the offering is “taken off the shelf.” The base prospectus describes the offering, the company’s operations, and how the proceeds will be used. The registration is submitted to the SEC for review and comment, which typically takes several weeks. Shelf registrations by WKSI companies are automatically effective when filed.
Types of Shelf Offerings
Continuous Offering
In continuous offerings, securities are offered immediately after the registration statement is effective. They continue to be offered through the registration period. Company dividend reinvestment programs are an example of these types of offerings.
Delayed Offering
Delayed offerings take place sometime in the future—or not at all. A delayed offering might be used to register existing shares of stock held by insiders for resale in the future.
At-the-Market Offering
Shares are to be sold through an existing trading market, like the Nasdaq Stock Market or New York Stock Exchange, at the market price instead of a fixed price.
Over-the-Wall Transactions
Shelf registrations can be used by underwriters to pre-market an offering to institutional investors before a public announcement. Underwriters contact institutional investors regarding an upcoming offering without disclosing the details. If the investors are interested, they are “brought over the wall” and the details of the offering are disclosed. Over-the-wall transactions need shelf registrations to meet regulatory requirements.
Primary Offering
A primary offering of new common stock has special requirements. The company has to have an aggregate market value of voting and non-voting common equity held by non-affiliates of at least $75 million.
Secondary Offering
Securities offered in a secondary shelf offering have to be the same class as the securities listed on a national exchange.
What It Means for Individual Investors
Shelf-offering registrations can potentially give investors insights into a company’s plans for raising capital. Some analysts view shelf registrations negatively because new shares will dilute and depress the price of current shares. Others take the view that shelf registrations are a potential tool to retire debt, which will benefit shareholders.
