In the 1980s, the use of continuously offered medium‐term notes (MTNs) grew in popularity for U.S. corporate borrowers as they could take down, or issue notes as needed, from a shelf registration as investor demand allowed. Growing from an $800MM market in 1981¹ to $131B in 2011,² MTNs became a way for the issuer to diversify its investor base and access incremental fixed‐rate debt periodically. Issued under SEC Rule 415, MTNs are sold from a shelf registration with the filing of a prospectus supplement that identified a maximum amount of securities that could be sold at‐the‐market and identifying the named underwriter(s).

In the mid‐1980s, this concept of continuous, at‐the‐market (ATM) issuance off of a shelf registration was adapted to the equity securities market, initially for smaller market capitalized companies. While the MTN model thrived, the equity model failed to gain significant traction among corporate finance managers. It may have been due to a number of factors, including the relative lack of sufficient trading volume, visibility of the issuer's selling activity on the exchanges, or the Street's institutional bias toward marketed equity offerings. The equity ATM issuance strategy didn't really go mainstream until the financial crisis in 2008–2009 when the corporate need for capital in a constrained market led CFOs to explore all liquidity options, including the ATM model, for equity capital. As the ATM strategy gained wider acceptance beginning in 2010, it has since grown to become an important and innovative tool to manage efficient and discreet equity capital formation. A total of ∼260ATM programs were filed in 2015 representing an issuable amount totaling ∼$41.7 billion.³ While seemingly not a significant total versus primary or secondary equity offerings, which numbered over 900 with a total equity issuance of nearly $330 billion, the ATM model still represents an important equity‐raising option for U.S. corporations.

Conventional equity offerings are conducted in the public markets through several issuance forms; overnight “bought” deal, marketed deal, and initial public offering (IPO) are common examples. In each case, the underwriter is usually agreeing to purchase the shares from the issuer and in turn reselling the shares to investors. This is the case in a firm‐commitment underwriting where the underwriters assume the risk once the shares are committed to. Smaller issuers may use a best‐efforts or a mini‐maxi structure that mitigates some of the underwriting risks compared to the firm‐commitment underwriting. In a best‐efforts underwriting, the underwriter will use its best efforts to sell all of the offered shares and, to the extent the total order book falls short of the full offering amount, the issuer may choose to accept the amount sold. In the case of a best‐efforts, all‐or‐none offering, as the name suggests, the full deal must be sold. In a mini‐maxi offering, similar to the best‐efforts, the issuer establishes the minimum amount of equity that must be sold in order to effect the issuance.

Overnight bought deals are typically arranged between the issuer and a small group of underwriters (as few as one and as many as three or four). The underwriter(s) agree to purchase from the issuer at a negotiated price the full amount of the offering immediately following the market close. This can be at a small or large discount to the stock's closing price. These issuances will not have a group of underwriters beyond the book‐running manager(s) and the book‐running manager is responsible for distributing the shares. In marketed deals, an underwriting syndicate is formed to maximize the distribution of the offering. In each case, firm‐commitment underwritings provide the issuer with certainty, as the underwriter is committed for the whole issuance amount on the issuance date.

In contrast, at‐the‐market equity financing is, in simplest terms, a periodic or continuous offering of equity securities that are sold, on a commercially reasonable basis, by a selling agent (a broker‐dealer engaged to manage the sales) on a securities exchange rather than directly to investors. The power of the issuance strategy is largely dependent upon the liquidity of the stock (average daily trading volume) and share price: The greater the trading volume, the more shares can be sold into the market without disrupting the market price; and the higher the share price, the more issuance proceeds are available to the issuer. Generally speaking, the selling agent will target sales at 10% to 15% of the stock's average daily trading volume, although there may be times of greater or less than that range, depending upon market conditions. The selling agent receives a commission based upon the amount of shares sold.

SECURITIES OFFERING REFORM OF 2005

Prior to the Securities Offering Reform, effective in December 2005, the SEC rules for securities registration limited a shelf filing's effectiveness to two years and imposed other requirements for larger corporations that were no longer practical. One of the more important concepts introduced by the new rules was defining a new category of issuer, the well‐known, seasoned issuer⁴ (WKSI), that could have its shelf registration filed on Form S‐3 or F‐3 become automatically effective without further SEC review. This gave the issuer the ability to issue securities immediately following the registration if it so chose. It also eased certain communications rules providing a safe harbor for issuers to provide increased communication of factual information over the course of an offering. Further, the rule extended the effectiveness of the shelf registration from two to three years. Most importantly, the reform permitted WKSIs to file an automatic shelf registration without being required to identify the amount of securities to be sold, giving the issuer the ability to pay the requisite SEC filing fees on a pay‐as‐you‐go basis as the issuer takes down securities from the shelf. This change, among others, provided issuers with greater financing flexibility and gave the equity ATM financing model an opportunity to evolve into a viable financing tool, especially for larger corporate issuers.

SEC Rule 415, originally adopted by the SEC in November 1983, addresses continuously offered securities, and was, most importantly, modified by the Securities Offering Reform to eliminate certain existing limitations for shelf registrations allowing for primary at‐the‐market offerings of equity securities. In addition, prior to the 2005 reforms and subsequent revisions in 2008, issuers were limited to filing up to 10% of their unaffiliated market cap. The new rule eliminated this cap, which was a significant inhibiting factor for the ATM equity model especially for small and mid‐cap companies. Rule 415 permits the sale of securities registered on Form S‐3 or Form F‐3 to be sold on an immediate, delayed, or continuous basis and specifies that “the term ‘at the market offering’ means an offering of equity securities into an existing trading market for outstanding shares of the same class at other than a fixed price.”⁵

The Reform also addressed Prospectus Delivery protocol with a new rule, Rule 172, implementing a new access‐equals‐delivery regime that creates an exemption to Securities Act Section 5(b)(1) to allow trade confirmations for secondary offerings to be sent without an accompanying prospectus. The SEC made the assertion that given the breadth of electronic access to the initial filing, including the SEC's EDGAR System,⁶ the investor was presumed to have had the opportunity to review the prospectus. In addition, for securities sold by a broker‐dealer on an exchange under the amended Rule 153, neither the issuer nor the selling agent would be required to deliver a prospectus to investors beyond the initial filing at the commencement of the program.⁷ This change provided another benefit to the ATM model in that the agent would not be required to deliver prospectuses with each sale.

Taken all together, the Securities Reform of 2005 was a game‐changer for the equity ATM model as it provided the model with broader applicability for more prospective issuers, and in time those issuers began to adopt the issuance strategy. One catalyst, the financial crisis beginning in 2007, put the ATM model at the forefront of equity capital‐raising strategies for a growing number of companies. Another was the growth in electronic trading venues.

THE RISE OF ELECTRONIC TRADING

Introduced in the mid‐1990s, alternative trading systems (ATSs) provided an electronic medium to bring buyers and sellers of securities together without the need for a broker intermediary. Initially dealing primarily in debt securities and limited partnerships, the ATS model evolved creating Electronic Communications Networks (ECNs) that provided direct access to the NASDAQ trading system for equities. Traders were able to route buy and sell orders electronically, allowing greater share volume at a lower cost than orders handled by floor brokers. Initially, transparency was an issue as price discovery lacked uniformity and the SEC amended its order handling rules in 1997, which in turn led to an expansion of ECN venues. The new rules imposed two conditions on market makers: They must publicly disseminate their own buy/sell offers as well as limit orders placed by their customers and they must include all quotes provided by any other ECN. The intent was to ensure that the particular ECN was not being used to show better quotes than the NASDAQ exchange.

The rise of the ECN was driven by two key objectives of the participants: (1) the ability to handle large equity orders and (2) maintaining buyer/seller anonymity. Large buy/sell orders could be sliced into many smaller orders and fed through the ECN without identifying the ultimate buyer/seller. The ECN became an important tool for institutional investors such as mutual fund managers to manage their larger portfolio trades without tipping their hand as to their buying or selling intentions.

The ECN also provided an important component to the ATM model giving the selling agent a means to sell large amounts of an issuer's shares discreetly and at a low transactional cost. The ATM model would not have flourished without the ECN as an electronic link to the exchanges.

As ECNs continued to grow in number and trading volume, the use of so‐called dark pools also expanded since 2007.⁸ Dark pools provide an institutional investor or trader the ability to place limit orders for large blocks of stock anonymously away from the exchange without publicly displaying the price or size of the order, which is the case in the “lit” markets on the exchange. The trade is executed when another anonymous order(s) on the other side of the trade is identified by the dark pool at the same limit price. The ATM model is well‐suited to using dark pools as one of the venues for trading by enabling the issuer and selling agent to remain anonymous in selling large amounts of shares and avoiding tipping off the market, thus not potentially adversely affecting the share price. As trades are completed, they are printed to the National Consolidated Tape as over‐the‐counter transactions between ECNs with no identifiers indicating who the ultimate buyer/seller was.

THE GREAT RECESSION

Corporate liquidity was severely challenged following the collapse of Lehman Brothers on September 15, 2008, which set off a chain of financial crises. Financing options became less readily available as corporations looked to realign their balance sheets, pay down debt, and, for some, acquire distressed assets at bargain prices. The Dow Jones Industrial Index fell from 11,416 on September 15, 2008, to a low of 6,595 on March 6, 2009,⁹ a loss of 42.25%.

With companies looking to reduce their balance sheet leverage, the choice between asset sales and equity issuance became problematic. Asset prices had little price support given the lack of market liquidity and, with the sharp declines in stock prices, corporations had a dilemma to deal with in raising equity capital. Steep discounts on secondary equity offerings made that option unattractive for many companies. The ATM model, still somewhat novel to the broader market, became an option that several companies, particularly real estate investment trusts (REITs), used to shore up their balance sheets. In 2008, out of an estimated total of 58ATM programs filed totaling approximately $9.2B, 22 programs were for REITs (including mortgage REITs) totaling $1.8B. Also notably, Ford filed two $500MM ATM programs in 2008 that it used to repurchase its debt in the open market at significant discounts from par. Five electric utilities also filed inaugural programs totaling $650MM to help pay for construction work in progress, repay short‐term indebtedness, and for general corporate purposes. Four airline companies filed ATM programs totaling approximately $900MM used to repay short term indebtedness and for other general corporate purposes.¹⁰ The ATM model became battle‐tested.

In 2009, over 120ATM programs were filed totaling over $39B, a fourfold increase over 2008. REITs accounted for over one‐third of the number filed with an issuable amount of over $6B.¹¹ Banks also adopted the strategy filing 22 programs with an issuable amount totaling over $22B. The largest ATM program filed that year was Bank of America in May, which filed a program for up to 1.25 billion shares (∼$12B). The prospectus supplement stated the use of proceeds as only for “general corporate purposes.” Other banks, including Huntington Bank, used their programs according to their respective prospectus supplements for the “possible repurchase of debt securities” in addition to general corporate purposes.¹² During 2009, the ATM model began to get attention across the greater corporate finance landscape.

As the economy began to stabilize and market liquidity improved, beginning in March 2009 as investor confidence grew, the utility of ATMs gradually shifted from defense to offense. Firms such as REITs scaled back their debt repurchases and looked to begin acquiring assets at relatively attractive prices beginning in 2010 using their access to the equity market with follow‐on offerings as well as ATMs. Asset prices had fallen during the recession and this was an opportunity to be taken advantage of. The president and CEO of Host Hotels & Resorts, Inc. stated on the company's fourth‐quarter 2009 earnings call, “Given our successful capital raising efforts, we are well positioned to take advantage of opportunities as they begin to arise.”¹³ In 2015, companies continued to use the ATM model as a tool to reduce leverage as cited by Sabra Health Care REIT, Inc. in their January 12, 2015, guidance update: Commenting on Sabra's deleveraging efforts, Rick Matros, chairman and CEO said, “Strong demand under our ATM program allowed us to lower our leverage more quickly than we had anticipated”¹⁴ as well as funding capital projects.

The incremental nature of asset acquisition and project financing activity may often match the capital‐raising capacity of the ATM model for many companies, making the ATM a useful strategy, especially in the REIT and Energy sectors.

GROWTH OF THE ATM MARKET

As seen in Figure 28.1, the dramatic growth of ATM filings began in 2009, with follow‐through in 2010, largely attributable to the financial crisis and the ensuing disruptions in the financial markets. As economic stability grew, the demand for equity eased but the use of the ATM strategy continued to expand, growing steadily each year from 2011 through 2015.

By year‐end 2015, the use of the ATM strategy became an equity tool of choice for three capital‐hungry industries, REITs (mortgage and equity), Energy (primarily master limited partnerships, or MLPs), and Utilities, which all together accounted for approximately $33B or ∼79% of the total $41.7B ATM program value filed in 2015. Table 28.1 and Figure 28.2 describe the scope of the ATM market FYE 2015.¹⁵

As mentioned, the Energy/MLP sector is one of the significant users of the ATM strategy due to growing market liquidity coupled with the growing need for capital, and it has fully embraced ATMs since 2012 as seen in Figure 28.3. In fact, this sector's ATM filing amounts have exceeded its follow‐on offerings since 2013.¹⁶

To focus on the equity REIT market specifically, one of the most prolific users of the strategy, Figure 28.4 illustrates the growing use of ATMs compared to follow‐on offerings from 2006 through yearend 2015 (this dataset excludes mortgage REIT filings). Prior to 2009, ATM programs were a small fraction of the total equity raised by REITs. In 2009, 24% of the total equity offerings filed was with ATMs. For year ended December 31, 2015, 48% of total equity filings were for ATMs.¹⁷ One of the principal drivers of the ATM model for equity REITs is the ability to finance property development, short‐term debt repayment, and incremental asset acquisitions. Larger M&A activity continues to be principally financed with follow‐on, either marketed or underwritten, offerings given the larger capital‐raising capacity.

ATM FINANCING VERSUS FOLLOW‐ON OFFERING

ATM financing has distinct advantages and disadvantages to traditional follow‐on or marketed offerings. The principal advantage is the potentially lower all‐in cost of raising equity. As the term at‐the‐market implies, shares sold under an ATM program are sold at current market prices throughout the trading day. Follow‐on offerings typically price at a discount to the prior day's closing price with such discounts ranging from 0% to 5%+ based on our review of recent equity offerings during 2015. The other main cost advantage to the ATM model is the lower underwriting commissions, with ATM program commissions generally ranging from 1% to 2%+ of the amount sold as compared to follow‐on equity offering commissions ranging from 3% to 5%+ based on our review of equity offerings filed in 2015. Taken together, the ATM structure may result in a potential total savings of 1% to 10%+ of the amount sold. Discounts and commissions vary widely depending on the issuer, its industry, share liquidity, and general market conditions, so one should consider these factors in context.

Other distinguishing elements of the ATM model include the ability to raise equity capital when, as, and if needed and the ability to be opportunistic as to timing and price. Unlike follow‐on offerings where all of the capital is raised at once, ATM programs permit the issuer to raise targeted sums over time to cover known or anticipated expenditures when needed (such as funding development or redevelopment projects) and in effect dollar cost average the share price on equity raised. An issuer may also choose to target a minimum price range in which to issue shares and has the ability to do so with the ATM program as the program may be turned on or off at any time, even intraday. Issuance flexibility is the hallmark of the ATM model. Furthermore, raising capital as needed reduces the effect of negative carry as capital is theoretically deployed accretively as it is raised as opposed to a larger follow‐on where the funds may be underinvested until they are deployed.

As shares sold using the ATM model are distributed directly into the exchange, the issuer cannot target a particular investor base, be it retail or institutional, unlike a follow‐on where the issuer may direct that its shares be marketed to a desired investor base. The ATM selling agent does not know the identity of the ultimate buyer, nor vice versa. The agent's sole objective is to sell shares at the best current market price available, selling into existing market liquidity, and will align its selling strategy to best achieve that objective. As discussed further in what follows, the agent will often slice larger blocks of stock into smaller trades throughout the trading day in order to avoid adversely affecting the price, which could end up favoring smaller retail investor orders. That said, many institutional investors, when targeting a larger block purchase, may also slice their buy order into smaller lots similarly to avoid impacting the market price of the shares.

The main disadvantage with the ATM strategy is price uncertainty vis‐à‐vis the follow‐on offering. The pricing of the follow‐on is established on the sales date for the full issuance amount, whereas the total price of an ATM equity raise is the weighted average price of the shares sold over the course of the selling period, which may be as short as a few days or weeks to a month or more. So, if the share price declines over the selling period, the average price will be less than the prices earlier in that period. The converse is true if the share price rises during the period. There is market price risk in the ATM model that should be taken into account when evaluating the two strategies.

Another potential disadvantage with the ATM is the relative market liquidity for the issuer's shares (i.e., How long will it take to raise $X million given the company's average daily trading volume and price?). For some companies, this may be a significant negative factor if their average volume is light (for example, trading less than 100,000 shares/day) and the share price is relatively low. For larger‐cap companies, this may not be a significant limiting factor. For example, for a company with an average share price of $45/share and an average daily trading volume (ADTV) of 5,000,000 shares/day, an ATM program could theoretically raise $22.5MM to $33.7MM per day assuming the agent was selling 10% to 15% of ADTV. Similarly, a company with an average share price of $45/share with ADTV of 175,000 could expect a daily capital raise of only $.8MM to $1.2MM. However, a company with a share price of $145/share and ADTV of 175,000 could theoretically raise $2.5MM to $3.8MM per day. In evaluating ATM liquidity, ADTV is the more important metric to consider when reviewing this financing alternative.

DUE DILIGENCE REGIMEN

An important aspect for issuers evaluating the use of the ATM model is the selling agent's continuing due diligence regimen and the extent to which that may engage management over the term of the ATM offering period. An ATM program is designed to be used over a number of months or even years and the need to maintain ongoing due diligence by the selling agent is an important element of the agent's ability to participate in the offering. The agent and its counsel will examine such corporate documents, minutes, resolutions, management letters, financial statements, and such to be able to establish the necessary level of comfort that all questions have been asked and answered. The agent and its counsel must be able to determine that the prospectus at the time of sale is current and accurate in all material respects.

The frequency and scope of the diligence protocol will vary depending on the issuer, its industry, or an agent's institutional requirements. In some cases, an agent may memorialize the diligence protocol in the Sales Agency Agreement; another may require daily bring‐downs while the issuer is selling shares. Other agents may take a less structured stance on diligence protocol. Market practice requires, however, that if an issuer expects to be in the market, at a minimum, quarterly bring‐downs, updated opinions, corporate certifications, and comfort letters will be required by the selling agent.

Under certain circumstances, the diligence process may be temporarily suspended if the company determines that it will not be selling shares in a given quarter. The agent will in any event require a bring‐down from the last diligence review when the company chooses to issue shares. While the company is an active seller, it is necessary that the selling agent be attentive to any news relating to the issuer or its industry that may cause concern, and if so, will alert the company and possibly cease selling activity if necessary. The issuer is required under the Sales Agency Agreement to alert the agent if it determines it has material nonpublic information, and if so, the agent will cease selling shares until such information becomes public (and such information typically is “in the market” for 24 hours). The Sales Agency Agreement will typically contain this construct as well.

TRANSACTION PARTICIPANTS AND TYPICAL ATM DOCUMENTATION

At‐the‐market programs are in effect statutory underwritings and the participants and documentation involved will be substantially similar to any public offering of securities. The main documentary difference between the ATM model and a follow‐on offering is the form of the Sales Agency, or Underwriting, Agreement. Given the continuous nature of the sale of securities, the Sales Agency Agreement defines the terms of distributions, conditions precedent to commencing a selling period, and the method of sale (including the option of negotiated block trades) and settlement. The Sales Agency Agreement will define when and how shares will be sold by a selling agent and the issuer will provide for periodic diligence updates as well as legal opinions, comfort letters, and issuer representations and warranties.

The ATM transaction participants and responsibilities include, like follow‐on offerings, the following:

• Issuer: Diligence participation, secretary's certificate, officer's certificate, NYSE Supplemental Listing Application, press release (if applicable)
• Issuer's counsel: Prospectus supplement, Form 8‐K, 10b‐5 opinion, negative assurance letter
• Issuer's auditors: Diligence participation, comfort letter
• Selling agent(s): Due diligence, representation letter to the auditors
• Selling agent's counsel: Due diligence, Sales Agency Agreement, 10b‐5 opinion

ATM deliverables will typically include the following prior to initial filing:

• Prospectus/prospectus supplement (Form S‐3 and/or Form 424b‐5)
• Sales Agency Agreement and Form 8‐K
• Comfort Letter with circle‐ups
• Secretary's certificate
• Officer's certificates
• Issuer counsel opinion and negative assurance letter
• Issuer counsel Sales Agency Agreement opinion
• Agent's counsel opinion and negative assurance letter
• Instruction letter to transfer agent
• Issuer opinion to transfer agent
• Certificate of transfer agent
• NYSE Supplemental Listing Application

Other transaction documents may include:

• Diligence materials request
• Management and accounting diligence questionnaires
• Organizational documents
  • Good‐standing certificates
  • Board resolutions
  • Incumbency certificates
• Representation letter from selling agent to auditors
• Press release (if applicable)
• “Blood letter” (if applicable)

The timing to put an ATM program in place is largely dependent upon the extent of the due diligence work that needs to be undertaken. The Sales Agency Agreement documentation has been substantially standardized and as such there is not much to be negotiated in the Agreement (Sales Agency Agreements will contain the customary representations and warranties seen in a follow‐on Underwriting Agreement and many issuers will tailor the Sales Agency Agreement to the issuer's standard underwriting reps and warranties package). We have seen programs go from start to filing in as little as one week when diligence was current with all documentation agreed upon. Once the filing is made and deliverables confirmed, the company is in a position to commence issuing. Like most public securities offerings, ATM program filings are usually made pre‐opening or post‐closing of the stock market.

THE SELLING AGENT

The selling agent is the broker‐dealer that is responsible for managing the sale of shares when the company commences using the ATM program. Up until 2010, almost all ATM programs filed were managed by one agent, largely due to the relative novelty of the strategy, but also because the bulge bracket Wall Street firms did not want to cannibalize their higher fee follow‐on equity business for the lower commissioned ATM business and sought to marginalize the ATM strategy as a low‐cap targeted product. As the ATM strategy gained broader acceptance from a growing number of increasingly larger‐market‐cap companies, these firms ultimately joined the party, tacitly acknowledging the ATM model's place in the CFO's capital‐raising toolbox. This was first particularly noticeable in the Equity REIT and Energy markets beginning in 2010.

Figure 28.5 shows the number of agents for each ATM program filed from January 1, 2005, to December 31, 2015, and a trendline for the period.¹⁸ How many agents to appoint on a program is generally determined by the size of the program; the larger the issue, the more agents may be engaged. Determining how many agents to engage, an issuer will consider which of its banks/brokers should be included and what would be fair compensation for each agent. So, for example, the commission for a $100MM program with four agents would be $250k or $500k for each agent, assuming the program is fully drawn equally among the agents and assuming a commission rate of 1% or 2% respectively of the sale amount.

Multi‐agented programs are not in and of themselves overly problematic. Each agent enters into a separate but identical Sales Agency Agreement with the issuer and each agent will be listed on the filed prospectus supplement. The company will often appoint one of the agents to act as a lead agent to coordinate the documentation and diligence with counsel on behalf of the other co‐agents. The company will generally include all agents on all diligence update calls. Only one agent may be in the market selling on any given trading day.

CORPORATE BOARD AND MANAGEMENT OVERSIGHT

Corporate governance rules vary by corporate jurisdiction and state laws pertaining to board authorization of the sale of equity securities. Some jurisdictions, for example Delaware, require the board to authorize the issuance price prior to confirming the actual sale, which, in the case of an ATM program, would be logistically difficult given the continuous, even daily nature of the ATM model. In such cases where the sales may be made over a period of time, a board may delegate authority to a committee that may include members of the management team to determine the number of shares and the timing of the issuance, or it may authorize a resolution in which the same criteria are defined. The resolution must include maximum number of shares that may be issued, timing, and minimum price.¹⁹

Once the company's board of directors authorizes the issuance of equity and means of sale (e.g., follow‐on or ATM), the selling agent and its counsel will commence the diligence and documentation process with the assistance of management and its counsel. Management will provide such corporate documents, resolutions, minutes, and financials as may be requested by the selling agent. Upon satisfactory completion of the documentation, all parties will conduct a business and accounting diligence call prior to filing, following which opinions and comfort letters will be released and the SEC filing of the Sales Agency Agreement and the prospectus supplement may be filed. Once the program is filed, management will cooperate with the selling agent for the periodic updating of diligence during the program's term.

Corporate governance protocol defines certain blackout dates during which the company's employees or officers are not permitted to trade in the company's shares. Usually, these blackout dates key off of the company's quarterly earnings releases. The company should consult with its outside counsel to similarly define periods when it should be out of the market with its ATM program. Many companies will use its management blackout dates as the defined “no‐sale” period for the ATM program. Others have opted to close the selling window between quarter‐end and the earnings release. In some cases, an agent may predefine those periods and memorialize it in the Sales Agency Agreement.

Beyond the initial filing of the ATM program documents, the prospectus supplement, and the Sales Agency Agreement, the company has limited responsibilities for filing ongoing program‐related documents or notices. Generally speaking, sales made under the program need not be publicly reported other than in its quarterly earnings filings on Form 10‐Q or 10‐K, unless the amount sold could be deemed material. Materiality is not clearly defined by the SEC so the company should consult with its counsel as to what would constitute a material sale of equity in its particular case. Should the sale amount rise to an amount deemed to be material, the company will file a pricing supplement pursuant to Rule 424, or a current report on Form 8‐K, indicating retrospectively the amount that was sold during the quarter. Otherwise, the company will describe the sale of equity in its quarterly filings as it would for any capital‐raising activity.

If the issuer is in the market selling shares under the ATM program, and it comes to have knowledge of an event, or an impending event, such as a material acquisition, pending changes in management or the board, material litigation, or any other material nonpublic information that would necessitate the filing of a current report in Form 8‐K, the issuer will notify the selling agent immediately to cease all selling activity until such information becomes public (and such information typically is in the market, or seasoned, for 24 hours).

The ATM model has no lockup provision as is the case for most follow‐on offerings. The issuer is, however, proscribed from offering any sale of equity, direct or indirect, while it is in the market, except for certain circumstances such as exercises of stock options or grants or awards, dividend reinvestment or stock purchase programs, or shares issued in consideration related to future acquisitions (being mindful of material nonpublic information that may require the issuer to suspend sales under the program).

While the ATM program selling is active, the company will receive a daily trade blotter from the selling agent at the end of the trading session noting the number of shares sold, the average selling price, trade date, settlement date, and the amount of proceeds net of the agent's commission. The issuer will then notify its stock transfer agent of the sale amount each day and instruct the transfer agent to set up the transfer of the shares, via DTC's DWAC²⁰ system, versus payment, to the selling agent's account. Upon receipt of the shares, the agent will release the net proceeds to the issuer via fed funds wire.

MARKETPLACE ACCEPTANCE

During the mid‐2000s, until late 2010, most institutional investors criticized the ATM model citing a lack of transparency and no ability to vote on the use of proceeds by participating in a follow‐on offering. One commentary titled “The Case Against ATMs” submitted to NAREIT's reit.com in April 2010 stated that the “ATMs are an end run around the governance and transparency of the public market.”²¹ There was much debate at the time about the issuance strategy but companies continued to enjoy the benefits of the ATM model and, as more issuers adopted the strategy, antipathy toward the strategy subsided. Issuers were mostly transparent about their use of proceeds on a retrospective basis after they were in the market, usually on their quarterly earnings calls. Largely due to the prudent use of the ATM, buy‐side opposition to ATMs is no longer as contentious an issue as it was just five or six years ago.

We interviewed several sell‐side equity analysts in 2009 and 2010 on a no‐name basis and each one acknowledged the benefit to the shareholder through lower all‐in equity underwriting costs by raising more proceeds from the share sale. The rating agencies also looked favorably on the ATM model as it provided additional flexibility in raising equity, particularly coming out of the turbulent market period of 2008–2009. Moody's February 18, 2011, Credit Opinion for Equity Residential stated: “Credit strengths include: Good near‐term liquidity coverage supported by ample bank line capacity and access to multiple forms of capital” and specifically, “EQR's at‐the‐market share offering program also should continue to add to its capital base over the next three years.”²² The Fitch Ratings review of the outlook for REITs for 2015 cited the following related to ATM financing:

We believe portfolio focus and tactical diversification, lower risk growth strategies, good liquidity management, minimal share repurchase risk, and enhancements to capital access via at‐the‐market (ATM) equity programs are key drivers and will continue for the foreseeable future…. We believe issuers will continue to have access to low all‐in‐cost secured and unsecured debt and opportunistically access the equity markets via ATM programs or follow‐on offerings to fund acquisitions and development.²³

SIZING AN ATM PROGRAM

There is no established rule for determining the size of an ATM program. We have seen companies file programs for as little as 2% of market capitalization up to as much as 75% of market cap. The general practice has been sizing the program to reflect the issuer's reasonably expected equity needs over the next three to five years. As ATM programs now need not have a definitive term or expiration date, as it can remain active as long as the company's shelf registration is effective, the program can contemplate a longer time horizon for its equity needs to determine an appropriate size. If one looks at the average sizing of 2015's ATM filings in the equity REIT market, for example, it was ∼7% of market capitalization with a sample range of approximately 2% to 30%. In our experience, around 10% to as much as 15% of market cap is often the sizing range used by many of our mid‐cap clients and around 5% for our larger‐cap clients.²⁴

The market impact on share price upon filing an ATM program is rarely negative or pronounced. This is largely due to the market's recognition that the ATM is an option to issue equity, not an obligation, and most corporate users of this strategy have been prudent issuers when it comes to utilizing their programs. An important consideration is that any company should be prepared to provide a reasonable case for any potential equity raise as it will get questions about the program from investors and equity analysts.

REGULATION M

Rules 101 and 102 of Regulation M are intended to protect against potential market manipulation by imposing limitations on certain trading activity during an equity offering. These rules prohibit underwriters and their affiliates from directly or indirectly bidding for, or inducing others to bid for, a covered security until the applicable restricted period has ended. Reg M has an exemption for “actively traded” securities (i.e., ADTV of at least $1MM for issuers with a public float of at least $150MM). Thus, ATM programs for actively traded issuers have no Reg M restriction. Selling agents, however, are required to report all ATM trading activity to FINRA for compliance purposes, not for public use.

PROCEDURES AND MECHANICS OF THE ATM PROGRAM

Once filed, the ATM program is effective and the company may issue shares under the program, unless there is cause to suspend issuance due to lack of diligence updates or stale deliverables, company policies, and so forth, by delivering an issuance notice to the selling agent indicating the amount (in dollars or number of shares) to sell and the minimum price per share, or floor price, below which the agent may not execute trades. The issuer will also determine the length of each selling period, which may be one day or as many as 10 days. Additionally, the issuer may define any trading parameters (the board may have determined certain price bands or share price performance dictates), usually in consultation with the selling agent and its traders, such as a maximum percentage of the day's volume the agent may execute. The selling agent will acknowledge the issuance notice and its terms to the issuer and will commence selling.

The selling agent's trading desk will often have a pre‐market call with the issuer to discuss the tone of the market pre‐opening and review any economic or industry‐specific news anticipated that day that may have an impact on the market or sector. The trading desk will also want to gauge the issuer's priorities with respect to the issuance. For example, one issuer's priority may be to sell shares with less concern about relative price performance where another issuer may be more focused on relative price performance and will be more patient on the pace of the sales. Yet another issuer may take an opportunistic approach and ramp up or down selling activity at certain price points or certain relative price performance. The trader will offer to provide input on possible selling strategies that may help the issuer clarify its priorities and objectives. The trader wants to fully understand the issuer's objectives in order to best manage the selling of the shares and will want to determine those priorities before trading commences.

The traders execute the sales electronically into the exchange through an ECN or, if appropriate, directly through a floor broker. As the total issuance amount is typically large enough to move the market if executed all at once, the trader will slice a larger sell order into smaller lots, making many smaller trade executions, for example, a few hundred shares up to a thousand or more at a time, often using an algorithm to adjust the pace of selling in line with a specific, targeted percentage of ADTV. The agent may also look to use dark pools of liquidity, discussed earlier, in order to maintain anonymity while selling larger blocks of stock. The trader's job is to find the deepest liquidity for the shares and he or she may end up looking at several venues to find that liquidity. The trader will gauge the tone of the market in order to adjust the pace of the selling activity to ensure minimal adverse price impact, speeding up the selling rate during periods of price strength and easing the selling rate during weaker price performance. It is not unusual for a trader to write over 1000 tickets throughout the trading day (but just one ticket with the issuer), the objective being to minimize the risk that the selling activity has any ill‐effects on the share price.

Measuring a trader's selling performance should be gauged using two principal metrics: average daily sale price comparison to the day's VWAP; and relative stock price performance compared to a closely correlated index or peer group. In the former metric, a trader should be expected to meet or beat VWAP on average. Given the volume of shares that the trader is selling, as a proportion of the day's volume, achieving this metric should be attainable, barring some intraday extraordinary trading event or large closing crossing trades at the end of the session. The second metric is an important one to use as it measures relative price performance of the stock vis‐à‐vis its peers, taking external market movement out of the calculation. If the selling stock moves closely with its peer group, then the trader is generally having little or no adverse effect on the share price. If the share price is underperforming the peer group, the trader will try to determine if its selling activity is affecting the price, such as limiting or even ceasing trading activity for a period of time, or if there is something else having a price impact, such as market noise on the stock. The trader may also use this metric to take advantage of relative market strength in the stock versus the peer group by stepping up the selling pace. If the stock price is underperforming the peer group despite limited or no program selling activity, the trader will usually notify the issuer that something is producing a drag on price and may discuss tailoring the selling strategy with the issuer.

At the end of each trading session, the trader will summarize the day's results on a trade blotter and submit it to the issuer via e‐mail. The trader will generally include the following information: trade date, settlement date, number of shares sold, average sale price, total share volume for the day, VWAP, gross proceeds, selling commission, and net settlement price and proceeds to the issuer.

ATM SELLING STRATEGIES

The selling strategies employed by various broker‐dealers engaged in the ATM market may vary to a limited or even a large extent. Some traders tend to rely more on algorithmic trading strategies (algo trading), employing, for example, a volume‐weighted average price (VWAP) algo with a set‐it‐and‐forget‐it philosophy. Such algorithms are designed to target VWAP for the day, and, except for extraordinary trading events such as erroneous off‐market prints or large block activity at the highs or the lows of the day, will achieve the desired results. Some traders may engage in a smile‐and‐dial strategy, calling select institutional buyers to cross blocks of stock, usually at or around VWAP for the day. Yet others, arguably most traders, will employ a modified algo approach using a VWAP algo together with a more high‐touch managed selling approach using dark pools or other ECNs. Each strategy has its place and one may be more appropriate for certain issuers over others. For example, a smile‐and‐dial strategy might be more appropriate for less liquid issuers, such as those with a lower ADTV.

The ultimate objective for the trader, and the issuer, is to try to achieve the highest price for the shares sold on behalf of the issuer while avoiding having an adverse impact on the share price vis‐à‐vis its peer group. Trading anonymity is the important element in achieving this objective.

VARIATIONS OF THE ATM MODEL

Prior to the commoditization of the ATM model today, other forms of continuous offerings of equity were used, although with less broad market appeal. One such model was the equity line of credit in which an issuer would enter into a purchase agreement with a purchaser, often an institutional investor or a broker‐dealer, that gave the issuer the right, but not obligation, to sell or put shares to the purchaser at a predetermined price (often VWAP‐based), which price may include a discount.

Equity Line Financing was a similar concept to Equity Line of Credit except it was in effect an underwritten commitment on the part of a broker‐dealer to purchase shares at VWAP, less a spread, upon request by the issuer provided the selling price met or exceeded the floor price. The broker then sold the shares electronically, similar to the ATM methodology, putting the broker at risk on the average daily sale price versus VWAP. These programs were largely used by smaller public companies looking for growth capital such as biotech and technology companies as an alternative to structured PIPE transactions (private investment in public equity) and had higher commission rates than the ATM model, reflecting the broker's price risk premium.

Another variation of, or adaptation to, the present‐day ATM model was incorporating a forward purchase agreement into the ATM program that permits the issuer to sell shares at a current market price and settle the transactions either on a regular way basis (T+3) or at a later date, usually up to one year later. This structure involves a third party, typically an affiliated bank of the agent, to perform the duties of the forward purchaser who borrows the shares to be sold by the agent, creating a short position against an obligation of the issuer to deliver shares. The principal advantage of this structure is to establish a known cost of the equity raised now to fund an obligation in the future rather than taking the market risk in waiting until that future date to execute the equity sale. While not a widely used strategy, it has been used in the Utility, REIT, and Investment Management sectors.²⁵ Figure 28.6 shows a flowchart illustrating the forward‐ATM initial sale.

The forward is usually settled with the exchange of shares issued by the company in exchange for the funds raised by the forward seller as depicted in Figure 28.7.

Alternatively, the issuer may elect to unwind the forward sale and choose to cash settle the trades (should the need for the equity diminish) whereby the issuer pays, or receives, the difference between the net forward price and the current market price for the same number of shares as shown in Figure 28.8.

A whitepaper I co‐authored with attorneys from Dewey & LeBoeuf in 2010 goes into greater detail on this structure and may be accessed through this URL: http://www.bnymellon.com/foresight/pdf/equityfinancing.pdf.

SUMMARY

At‐the‐market offerings have evolved over the past 30 years into an effective and efficient source of equity capital that has a useful place in most CFOs' corporate finance toolboxes. With the wide array of electronic trading venues with greater access to liquidity and strategic trading tools the ATM model has become a powerful tool to manage targeted equity raising. Coexisting with traditional underwritten offerings, the ATM will continue to provide capital for project finance, balance sheet management, and incremental acquisitions. It will not replace the follow‐on for transformational M&A transactions. The ATM is not designed to do that.

As we continue to see the size and number of ATM filings grow, it demonstrates that corporate adoption of the ATM model and market acceptance of the strategy have affirmed the value of this form of equity issuance.