Dilution and Share Offerings Explained: S-1, S-3, 424B, ATMs and Reverse Splits

Dilution happens when a company issues new shares. Each existing share becomes a smaller slice of the company, and the new supply often pushes the price down. It is one of the most common reasons a small-cap runner reverses.

Why companies sell shares

Many small companies spend more cash than they make. Selling new shares is often the cheapest way for them to raise money, and the best time to sell is when the stock price is high, for example right after a big move on news.

The filings to know

• S-1 / F-1: a registration statement for new shares (F- forms are for foreign companies). It often comes before a first or follow-on offering.
• S-3 / F-3 (a "shelf"): lets the company sell shares over the next few years whenever it chooses. A shelf doesn't sell anything by itself, but it means the company can sell quickly.
• 424B (424B1 to 424B8): a prospectus with the terms of an actual sale: how many shares, at what price. A fresh 424B5 often means shares are being sold now.
• 8-K: a report of a major event. Offerings, ATM agreements and reverse splits are often announced in one.

At-the-market (ATM) offerings

With an ATM, the company hires a broker to sell new shares straight into the market, a few at a time, at whatever the price is. There's no single announcement day, so the selling is easy to miss. It tends to happen when volume and price are high, which can cap a rally.

Other ways shares are sold

• Registered direct and public offerings: a block of shares sold at a fixed price, usually below the market, often with warrants attached.
• Warrants and convertibles: rights to new shares later at a set price. When the stock trades above that price, holders can convert and sell.

Reverse splits

A reverse split combines shares, for example 1-for-10: ten shares become one, and the price is ten times higher. Companies usually do it to keep a stock above $1 so it isn't delisted. It doesn't change what the company is worth, but it is often followed by new offerings, because the higher price and smaller share count make selling shares easier.

How to use this

• Check recent filings before trading a low-float runner, especially one that has gone up a lot.
• A shelf or ATM in place means the company can sell into strength.
• Dilution risk isn't a sell signal on its own. Some offerings are priced well and the stock keeps running.

How Nexus Screener shows it

• Dilution risk: an S-1, S-3, F-1, F-3 or 424B filing in the last 30 days, or an 8-K about an ATM offering.
• Reverse split: an 8-K in the last 30 days that mentions a reverse stock split.
• 8-K today: the company filed a current report today.
• The Filings tab on every stock lists its SEC filings of the last 30 days, with links to EDGAR. Scans can filter on all three flags.

Flags are worked out from form types and the text of 8-Ks. Always read the filing itself.