What Is a Secondary Offering?

The term secondary offering refers to the sale of shares owned by an investor to the general public on the secondary market. These are shares that were already sold by the company in an initial public offering (IPO). The proceeds from a secondary offering are paid to the stockholders who sell their shares rather than to the company.

Some companies may offer follow-on offerings, which may also be called secondary offerings. These offerings can take on two different forms: non-dilutive and dilutive secondary offerings.

How Secondary Offerings Work

Private companies that want to raise capital may choose to sell shares to investors through an initial public offering. As the name implies, an IPO is the first time a company offers shares to the public. These are new securities that are sold to investors on the primary market. The corporation can use the proceeds to fund its day-to-day operations, make acquisitions, or for other purposes.

Once the IPO is complete, investors can make secondary offerings to the public on the secondary market or the stock market. As mentioned above, securities sold in a secondary offering are held by investors and sold to one or more other investors through a stock exchange. As such, the proceeds from a secondary offering go directly to the seller—not the company whose shares change hands.

In some cases, a company may perform a secondary offering—called a follow-on offering. This need may arise to raise capital to finance its debt, make acquisitions, or fund its research and development (R&D) pipeline.

In other cases, investors may inform the company of their wish to cash out of their holdings, while other companies may offer follow-on offerings to refinance debt when interest rates are low.

Types of Secondary Offerings

Secondary offerings come in two different forms. The first is a non-dilutive offering while the other is referred to as a dilutive secondary offering. We've outlined the differences between each below.

Non-Dilutive Secondary Offerings

A non-dilutive secondary offering does not dilute shares held by existing shareholders because no new shares are created. The issuing company might not benefit at all because the shares are offered for sale by private shareholders, such as directors or other insiders, such as company insiders or venture capitalists, who want to diversify their holdings.

The increase in available shares allows more institutions to take non-trivial positions in the issuing company, which may benefit the trading liquidity of the issuing company's shares. This kind of secondary offering is common in the years following an IPO, after the termination of the lock-up period.

Dilutive Secondary Offerings

A dilutive secondary offering is also known as a subsequent offering or follow-on public offering (FPO). This offering occurs when a company itself creates and places new shares onto the market, thus diluting existing shares. This offering happens when a company's board of directors agrees to increase the share float to sell more equity.

When the number of outstanding shares increases, this causes the dilution of earnings per share (EPS). The resulting influx of cash helps the company achieve its longer-term goals, or it can be used to pay off debt or finance expansion. This may not be positive for the shorter-term horizons of certain shareholders.

Effects of Secondary Offerings

Secondary offerings can impact investor sentiment and a company's share price. For example, investors may anticipate bad news if a large shareholder (especially a company principal) sells a significant number of shares.

An example of a company's share price being adversely affected by a secondary offering occurred with Capri Holdings (CPRI). The company announced a secondary offering of 25 million shares on February 19, 2013. The company's stock price fell by more than 10% from a closing price of $64.84 on February 19, 2013, to $57.86 by February 25, 2013.

A dilutive secondary offering usually results in a drop in share prices, but sometimes, markets can have an unexpected reaction to the offering. For example, CRISPR Therapeutics (CRSP) saw an increase in its stock price after announcing a secondary offering of five million shares on January 4, 2018. On January 03, 2018, the stock had closed at $23.52, and following the offering announcement on the 4th, CRISPR's stock price closed at $26.81 on January 5th for nearly a 14% gain.

The exact reason for an increasing stock price following a secondary offering may not always be apparent. Sometimes, investors respond favorably to the offering if it's believed that the proceeds from the sale may help the company. Examples of a favorably-viewed offering might include when a company uses the funds to pay down debt, make an acquisition, or invest in the company's future.

Real-World Examples of Secondary Offerings

In 2013, Mark Zuckerberg, the founder, and executive of Meta, (formerly Facebook), announced he was selling 41,350,000 shares he held personally in a secondary offering to the public. At a selling price of $55.05 per share, approximately $2.3 billion was raised. Zuckerberg stated he was to use a portion of the proceeds to pay a tax bill.

Rocket Fuel announced in 2014 that it would sell in a follow-on offering an additional 5,000,000 shares at $61 per share for a total of $305,000,000 raised. The move was prompted by a strong 2013 fourth quarter and a desire to capitalize on its high share price. The company sold two million shares, while certain existing shareholders sold approximately three million. Also, underwriters were able to purchase 750,000 in the offering.

On August 18, 2004, Alphabet's Google (GOOG) offered 14,142,135 shares of common stock at its initial public offering (IPO) price of $85.00 per share, raising more than $1.168 billion for the company. One year later, on September 14, 2005, Google Inc. issued a follow-on public offering of 14,159,265 shares of common stock at a price of $295.00 per share for an approximate total of $4.17 billion.