When a company begins selling shares of stocks, bonds, or other securities to the public, it’s called an offering.
If a company that has already made an initial public offering, any later offerings it makes are called secondary offerings, secondary distributions, or follow-on public offerings. Companies may make secondary offerings if they need cash, are looking to expand their business, or want to acquire another company.
Secondary offerings can have a significant impact on stock prices, so it’s beneficial for investors to understand how they work.
Let’s dive into the details.
What Is a Secondary Offering?
Any public sale of securities by a company after it has made an initial public offering is called a secondary offering.
When companies first issue stock or securities, they hold on to a certain amount, so during the secondary offering they put up some of their holdings for sale. Sometimes in a secondary offering, shareholders such as the CEO and founders sell a portion of their shares instead.
If the shares come from the company, the money raised from the sale goes to the company. If the shares are sold by individuals, the money goes to those sellers.
A secondary offering might also involve a combination of securities from the company and individual shareholders.
There are two types of secondary offerings: dilutive and non-dilutive. It’s important for investors to know the type of secondary offering because it can affect the value of the shares. More on that later.
Dilutive Secondary Offerings
A dilutive offering involves the creation of additional shares by the company, which in turn reduces the amount of ownership that preexisting shareholders have. As the name implies, the offering has a dilutive effect. Investors often have a negative sentiment toward dilutive offerings.
The company’s board of directors must approve of the increase in floating stock shares. The float of a stock is the number of shares available for trade.
Non-Dilutive Secondary Offerings
With non-dilutive offerings, no additional shares are created during the sale. A non-dilutive offering is often made by major shareholders selling their existing shares. This doesn’t have any effect on the company itself, except perhaps the investor’s perception about why the shareholders are selling.
This type of offering can also be beneficial because it allows more individuals and institutions to invest, which can increase the stock’s liquidity since there are more people buying and selling.
Examples of Secondary Offerings
Google did an offering in 2005 after its IPO in 2004. During the IPO, the company had a share price of $85 and raised $2 billion. During the secondary offering, the share price was $295 and the company raised $4 billion.
Then there’s Rocket Fuel, a company that made a secondary offering of 5 million shares in 2013. Existing shareholders sold 3 million shares and the company sold 2 million, all at a price of $34 per share. Just one month after the secondary offering, the value of the shares had gone up 30%, to $44.
IPO Investing at Your Fingertips
Get In On the Ground Floor
Why Make a Secondary Offering?
Similar to an IPO, a secondary offering helps companies raise money so they can expand their operations. Individual shareholders, such as CEOs, might choose to sell shares of stock to raise money for other purposes. This is a great way for companies to raise significant funds fairly quickly.
Companies may also hold a second offering between their IPO and the end of their stock’s lock-up period, which is a time when large shareholders are not allowed to sell shares. After the lock-up period, a stock’s price often falls when these shareholders sell off some of their shares. By holding a secondary offering before the end of the lock-up period, additional investors can benefit from the success of an IPO.
It’s important for investors to look into why a company is making a secondary offering before deciding whether to invest, as this can affect the price of the stock in both the short and long term.
Scouting Secondary Offerings
Most companies that file secondary offerings choose to do so soon after the end of the lock-up period after their IPO.
When a company wants to make a secondary offering, they file it for approval with the SEC.
Investors can find out about the latest secondary offerings in a few ways. The SEC has a database of secondary offerings called the EDGAR database, where investors can find out about them. Investors can also look to the NASDAQ list of secondary offerings made by companies listed on the NASDAQ stock exchange. Companies filing secondary offerings tend to get covered in the media and also put out press releases with details about the offering.
How Do Stock Prices React to a Secondary Offering?
The basic concept of supply and demand dictates that if there is more of something available, its price will decrease. This is sometimes what occurs during a secondary offering, but not always. If more shares are created, the price of the shares may fall.
Even when a secondary offering is announced, it can cause the price of a stock to fall. This is especially true with dilutive offerings because they decrease the earnings per share of the stock.
The price of stocks can also decrease during a secondary offering because the company issues the offered shares at a discounted price to incentivize investors to buy. This results in the price of the stock lowering to the discount price. The decrease in value can last a while because any investors who buy-in at the discounted price can sell at a slight increase and make a profit.
If a company creates new shares and sells them at market value with a discount to account for the amount of dilution, this generally results in the least amount of price volatility.
Although a secondary offering often results in a decline in stock price, that isn’t always the case. Non-dilutive offerings are viewed more positively, as they don’t affect the stock’s earnings per share or shareholders’ amount of ownership. Also, it can be seen as a good sign for the long-term value of the stock if a company is investing in growth and acquisitions.
Many secondary offerings don’t have any restrictions, but some may require a lock-up period similar to an IPO, during which investors aren’t allowed to sell their shares.
For Investors, Green or Experienced
Are you looking to start investing in secondary offerings or regular stock offerings? Using the SoFi app, you can track personalized financial goals, look at all of your accounts in one place, research your favorite stocks, buy Pre-IPO Stock, and more.
The SoFi Invest® online brokerage account allows investors to set alerts for stocks they’re interested in and buy and sell with just a few clicks—without commission fees. Using active investing, they can hand-select each stock they want to invest in.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
For additional disclosures related to the SoFi Invest platforms described above, please visit https://www.sofi.com/legal/.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer to sell, solicitation to buy or a pre-qualification of any loan product offered by SoFi Lending Corp and/or its affiliates.
Advisory services are offered through SoFi Wealth, LLC an SEC-registered Investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .