What is a Secondary Offering?

A secondary offering refers to the offering of securities that have previously been issued in an initial public offering. The sale of shares of a company that were previously made public. Secondary offering is permissible by the Securities and Exchange Commission in the United States, stocks or shares issued in this type of offering are registered before they are sold.

How does a Secondary Offering Work? 

There are two types of secondary offerings, they are;

• A dilutive secondary offering: this entails a company creating new block of shares to be issued during a public sale.
• A non-dilutive secondary offering: this is a type of offering in which major shareholders in a company sell portions of their holdings to interested investors. Earnings realized on such sale are given to the shareholders that offer parts of their holdings for sale.

Dilutive secondary offerings are otherwise called subsequent or follow-on offerings.

Non-Dilutive Secondary Offerings

In a non-dilutive secondary offering, a company needs not to create new blocks of shares to be offered to the public, rather, existing shareholders in a company give up some portions of their holdings in the company for sale. One major feature of a non-dilutive secondary offering is that the shares that existing shareholders of a company hold are not diluted. A non-dilutive secondary offering is mostly used after the lock-up period has ended.

Dilutive Secondary Offerings

A dilutive secondary offering is a type of offering in which a company creates new shares to be offered to the public on the secondary market, this offering dilutes the shares held by existing shareholders of the company. Dilution is caused in this type of offering because the number of outstanding shares that a company has increased, thereby reducing the per-share earnings of existing shares. Primarily, a dilutive secondary offering is used when a company needs equity which is used to offset debts or achieve future financial goals. When a company uses the dilutive secondary offering, there is often a decline in the price of stock.