What is a Follow-On Offering?

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 Does a Follow-On Offering Work?

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 Does a Follow-On Offering Matter?

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.