Secondary Offering Definition

What is a secondary offering in the stock market, what types exist, and what impact can you expect on the stock price? The answers to those questions and more you’ll find in this article.

What is a Secondary Offering? 

A secondary offering refers to the allocation and sale of new or existing shares by a company that is already public after its initial public offering (IPO). 

It allows companies to raise additional capital from public investors like you. Secondary offerings can provide funds for expansion, acquisitions, debt repayment, or other corporate purposes.

Unfortunately, it is rarely a good sign if a company has to make a 2ndary offering because it clearly indicates that the company needs to raise cash. That’s why investors should always take a closer look at the reasons for the offering. If it is to hold the company just over water, then it might be time to look for alternative investments.

Types of Secondary Offerings

There are two primary types of secondary offerings you need to be aware of:

  • The first one is a non-dilutive offering, where existing shareholders sell their shares to the public. 
  • The second one is a dilutive offering, where the company issues new shares, increasing the total shares outstanding.

The difference is that non-dilutive offerings don’t impact the company’s share structure, while dilutive offerings decrease existing shareholders’ ownership percentages.

Reasons for Secondary Offerings

Companies do secondary offerings to raise capital for growth initiatives like new products, facilities, or geographic expansion. 

They also allow investors or employee shareholders to monetize their holdings and help increase the public float and trading liquidity of the stock. However, a higher float is not necessarily good.

Secondary Offering Process

The secondary offering process involves several steps. It includes hiring underwriters, filing a registration statement with the SEC, providing details like the use of proceeds, conducting investor meetings and marketing, and finally, pricing and issuance of new shares.

Impact on Stock Price

Dilutive secondary offerings tend to have a negative short-term impact on the stock price due to the increase in shares outstanding and supply.

However, the raised capital can fund growth opportunities that may benefit the company and stock long-term if deployed effectively.

Primary vs. Secondary Shares

Primary shares are newly issued by the company, with proceeds going to the company.

Secondary shares refer to existing shares sold by early investors/employees, where the company doesn’t receive any cash proceeds from the transaction.

Secondary Offering Examples

Well-known examples include Amazon’s $16 billion offering in 2020, GameStop’s secondary offering of $1 billion in 2021, and AMC’s $350M offering in 2023.

Regulations on Secondary Offerings

Secondary offerings have to comply with SEC regulations, such as filing a registration statement, disclosing the use of proceeds, not making misleading statements, and following rules around pricing, marketing, and insider trading. State securities laws may also apply.

Wrap Up

A secondary offering seldom goes well for the investor because this type of raising capital indicates that a company needs more money, which is not always a good sign. Investors tend to like share buybacks more.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.