What is a Shelf Offering?
A shelf offering is a sale of stock by a company over time.
How Does a Shelf Offering Work?
Let's say Company XYZ is a public company and would like to sell shares in order to raise money to build a new factory. The company already has some Series A common stock outstanding; this new offering would be of Series B common stock that carries a different dividend. Company XYZ wants to sell 1 million shares of the stock, but it doesn't need the money all at once, so it files a shelf offering with the SEC under Rule 415 of Regulation C of the Securities Act of 1933.
Company XYZ hires an investment bank to underwrite the offering, register it with the SEC and handle the sale. The company receives the proceeds from the sale of the shares.
Generally, a company can register a shelf offering up to three years in advance, meaning that it has that long to sell the shares. The company files a Form S-3, F-3, or F-6 to do this (the form depends on the type of security and the nature of the issuer). The issuer still has to file the quarterly, annual and other disclosures with the SEC even if it hasn't actually issued any securities under the shelf. If the three-year window is getting close to closing and the company hasn't sold all of the securities in the shelf registration, it can often file replacement registration statements to extend the offering.
Shelf offerings can be delayed offerings or continuous offerings. In a continuous offering, the company is agreeing to make shares available for sale immediately (though it might not actually sell any immediately, and that is the company's choice); in a delayed offering, the company does not intend to make any shares available for sale until later in the three-year window. The information contained in the shelf offering statement varies depending on whether the offering is delayed or continuous and whether the issuer is already public. Regardless, most of the time the prospectus describes the type of security offered, a summary of the issuer's business, the use of proceeds, and the plan of distribution. Sometimes the issuer will provide a prospectus supplement with more detail.
When the company actually issues shares registered under the shelf offering, we say the company is doing a 'takedown.'
Why Does a Shelf Offering Matter?
Shelf offerings give the company the flexibility to get the paperwork out of the way now and then offer the shares only when it needs the cash or only when the market conditions are good. They also signal to investors that the company intends to raise capital for new projects, possible acquisitions, or maybe to refinance something. However, companies aren't the only entities that can do shelf offerings; they can also involve founders or other managers (such as venture capitalists) selling all or a portion of their stakes in a company. Shelf offerings thus give these shareholders a way to monetize their positions.
Shelf offerings can dilute existing shares considerably if the offering comes from the company because new shares are being created. Selling a large volume of shares all at once can exert downward pressure on the stock's price -- a situation that is exacerbated when the stock is already thinly traded.
