If a shelf registration is "loading the gun," a 424B prospectus is pulling the trigger. This filing means shares are actively being sold into the market — often without any press release or announcement.
What is a 424B Prospectus Supplement?
A 424B prospectus supplement is a document filed with the SEC that provides specific details about a securities offering being made under an existing shelf registration. While the shelf gives general permission to sell securities, the 424B specifies exactly what's being sold, at what price, and under what terms.
The "424B" refers to Rule 424(b) under the Securities Act, which requires companies to file final prospectuses when actually selling securities.
Types of 424B Filings
| Form | Description | Dilution Risk |
|---|---|---|
| 424B1 | Initial prospectus for a new offering | High - New offering announced |
| 424B2 | Pricing supplement (final pricing) | High - Offering priced and launching |
| 424B3 | Prospectus used after effectiveness | Medium - Check for selling shareholders |
| 424B4 | Post-effective amendment prospectus | Medium - Updated terms |
| 424B5 | Prospectus supplement for shelf takedown | ⚠️ Very High - Active dilution |
Understanding ATM (At-The-Market) Programs
The most insidious form of dilution is the ATM program — "At-The-Market" offerings that allow companies to sell shares directly into the open market at prevailing prices, without any announcement.
How ATM Programs Work
- Company establishes ATM agreement with an investment bank (sales agent)
- Files 424B5 prospectus supplement detailing the program
- Sales agent sells shares gradually into the market
- No announcement per sale — company reports quarterly
- Program continues until terminated or fully used
Unlike traditional offerings with a set price and date, ATM programs create constant selling pressure. The company's sales agent has incentive to sell as many shares as possible (they earn commission), often dumping into any price spike. You might wonder why the stock keeps failing at resistance — it could be ATM selling.
How to Identify ATM Filings
When reviewing 424B5 filings, look for these ATM indicators:
- "At the market offering" or "ATM" in the title or cover
- Reference to a sales agreement or equity distribution agreement
- Named sales agents (common: Canaccord, H.C. Wainwright, Jefferies, B. Riley)
- Language about selling "from time to time" at "prevailing market prices"
- No fixed offering price (instead references market prices)
Reading the Critical Numbers
When a 424B is filed, focus on these key data points:
1. Total Offering Amount
How many shares or dollar amount is being sold? Compare to the company's current float and market cap to assess dilution impact.
2. Offering Price
For fixed-price offerings, is it above or below current market? Discounted offerings are bearish. ATM programs have no fixed price.
3. Warrant Coverage
Many offerings include warrants — options to buy more shares later. Check the warrant exercise price and quantity. High warrant coverage means more dilution coming later.
4. Use of Proceeds
"General corporate purposes" is often code for "we're running out of money." Look for specific projects or debt repayment.
Timeline: When Dilution Happens
- 424B1/B2 Fixed Offering: Dilution happens at closing (usually 1-3 days after filing)
- 424B5 ATM Program: Dilution happens continuously over weeks/months
- 424B3 Selling Shareholders: Existing investors selling (not treasury shares)
Real-World Impact
When a 424B5 ATM filing hits, expect:
- Immediate selling pressure from traders who monitor filings
- Ongoing resistance as the sales agent dumps shares into rallies
- Failed breakouts as supply overwhelms demand
- Gradual erosion of stock price until program is exhausted