On Wall Street, a secondary offering refers to any large-scale public offering of stock by an existing public company. It is called a secondary offering because it occurs after the company’s initial public offering. This can refer either to selling additional shares in the market or to large shareholders in an existing company selling a significant amount of their shares. The primary reason for the secondary offering is to raise capital, whether for the company itself or for the major shareholders.
Raising Capital Through Secondary Offering
When a company needs to raise additional capital beyond normal business operations, they have two general options. The first is to borrow the money either through the public offering of bonds or other means. This is called debt financing and forces the borrower into a generally strict repayment contract with its creditors. Debt financing can also be expensive if the firm’s credit rating causes the market to demand high interest rates on the debt public offering. The second means is through a new public offering of stock, called equity financing. The company has much more short-term flexibility, may find it easier to raise additional capital, and is not bound to creditors.
Issuing New Shares of Stock
The costs of this type of secondary offering occur through shareholder dilution and through the creation of additional claims on the company’s earnings and assets. The method of issuing a secondary offering is similar to an initial public offering (IPO). An investment bank underwrites the new public offering and any investor can purchase the new shares. Current shareholders generally have no right of first purchase.
A secondary offering can also refer to any large public offering of stock which is not necessarily authorized by the company. A common case if this secondary offering is when initial company stakeholders, such as founders, financiers or early executives who received large quantities of stock in the IPO decide to divest their holdings in the company. The funds from these sales go to the individual owners and not directly to the company. In this type of secondary offering, there are no new shares created and thereby does not dilute current shares.