Secondary offering

Key Takeaways

  • A secondary offering is an offering by its issuer (original seller) comprising additional units of a previously issued security
  • Secondary offerings can be of two types: Non-dilutive and dilutive secondary offering
  • In a dilutive secondary offering, a company itself creates and inducts new shares into the market
  • In a non-dilutive secondary offering, the private shareholders such as venture capitalists offer the shares for sale

What is a Secondary Offering?

A secondary offering is an offering by its issuer (original seller) comprising additional units of a previously issued security. Secondary offerings are often also called as follow-on offerings. Secondary offerings can be of two types: Non-dilutive and dilutive secondary offering. 

What is the difference between the primary offering and secondary offering?

The primary difference between a primary and a secondary offering lies in the mode of acquiring the shares. In a primary offering, the issuer directly sells shares to the investors, whereas in a secondary offering, usually, investors purchase shares from sources other than the original issuer. However, that is not always true as in a dilutive secondary offering, the company itself reissues new shares into the market.

Types of Secondary offering

Secondary offerings are of two types, which are dilutive and non-dilutive secondary offerings.

Dilutive Secondary Offerings

A dilutive secondary offering is also called follow-on offering or subsequent offering. It happens when a company itself creates and inducts new shares into the market, thus diluting the existing shares. This case comes up when the board of directors of a company decides to increase the number of shares in order to see more equity. Increase in the number of outstanding shares leads to dilution of earnings per share. The cash influx thus generated can be used for paying off debt or for other longer-term goals. A dilutive secondary offering often results in a drop in stock price because of increase in the number of outstanding shares, but markets may react very unexpectedly too, such as an unexpected increase in the stock price, in response to secondary offerings if the investors see an optimistic future for the company.

Non-Dilutive Secondary Offerings

In a non-dilutive secondary offering, no new shares are created; thus, per-share earnings are not diluted. In this type of secondary offering, the private shareholders, such as venture capitalists offer the shares for sale in order to diversify their holdings. Years following an initial public offering, after the lock-up period, often witness such kinds of secondary offerings.