When a company issues equity in the stock market for the first time in an initial public offering, it's not necessarily the last time it will turn to the capital markets to raise money. A secondary offering is the issuance of additional equity shares to be sold in the stock market. Reasons for issuing equity again could vary from paying down debt to making an acquisition. The process involves filing regulatory documents and hiring investment bankers.
Exploring Participation in a Secondary Offering
A secondary offering, or seasoned equity offering, is also referred to as a secondary issue and is typically led by a company's chief financial officer and an investment banking team. The company issuing the shares hires one or more investment banks, and it may or may not be the same firm that led the issuers IPO. Together, the CFO and the bankers decide the number of shares to issue, the price for each share and the timing of the secondary offering. Shares in a secondary offering are often priced below the market price, or the value of existing shares in the market.
Evaluating Procedures for Issuing Equity Stocks
Before issuing equity stock in the financial markets in the U.S., a preliminary prospectus must be filed with the U.S. Securities and Exchange Commission. This gives the SEC and investors a glimpse into the financial health of the company. A company can issue the shares, or the stock can be sold by existing shareholders who own a significant portion of the company. The issuing company usually offers an allotment of shares to the investment bankers on the deal.
Assessing Investor Response
During the secondary offering process, from the announcement of the transaction to the close, the market price of the stock already trading in the markets will be affected. Selling addition equity shares into the stock market dilutes the total number of shares available for trading. Stockholders often greet news of a secondary offering by selling the stock, pushing the market price of shares currently trading lower. Investor response could be favorable when the management team clearly communicates the offering and if company executives purchase additional shares, too.
Identifying Important Considerations
When major shareholders issue stock in a secondary offering rather than the company, the stocks owned by current shareholders are not diluted. For instance, the Ancestry website announced in November 2010 a secondary offering, but noted that it was current stockholders who were selling shares, not the company. Subsequently, since the shares were already accounted for, there would be no dilution to current stockholders. The company also would not earn any profits from the offering.
- Ryan McVay/Photodisc/Getty Images