Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Follow-On Offering

What it is:

A follow-on offering, also called a secondary offering, is a sale of stock by a company or by an existing shareholder of a company that is already publicly held.

How it works (Example):

Let's say Company XYZ is a public company and would like to sell additional shares in order to raise money to build a new factory. This sale of additional shares is called a follow-on offering. Company XYZ would hire an investment bank to underwrite the offering, register it with the SEC, and handle the sale. The company receives the proceeds from the sale of the shares.

Company XYZ is not the only entity that can effect a follow-on offering, however. Let's say you own a very large block of Company XYZ shares -- maybe 100,000 shares. In this type of follow-on offering, the seller -- which is not Company XYZ in this case -- receives the proceeds.

Why it Matters:

Follow-on offerings can dilute existing shares considerably if the offering comes from the company because new shares are being created. Follow-on offerings from existing shareholders, however, do not dilute existing shares. Thus, it's important to know who the seller is.

In many cases, follow-on offerings from existing shareholders often involve founders or other managers (such as venture capitalists) selling all or a portion of their stakes in a company. This is often the case if the company's original IPO included a "lock-up" period during which the founding shareholders were not allowed to sell their shares. Follow-on offerings thus give these shareholders a way to monetize their positions.

Regardless of the source, selling a large volume of shares all at once can exert downward pressure on the stock's price -- a situation that is exacerbated when the stock is already thinly traded.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...