What is a Secondary Offering?
How Does a Secondary Offering Work?
Also called a secondary distribution, a secondary offering is distinguished from an initial public offering (or IPO) in that the proceeds generated by the sale of the shares goes to the shareholder rather than the issuing company. The selling shareholder originally paid for the shares in return for the equity. In the case of a secondary offering, that shareholder is simply reselling the shares in the market. In this sense, he is recouping the money he originally paid the issuing company in return for the shares.
For example, suppose Bob fully owns half of the total number of outstanding shares of company XYZ. Bob originally purchased these from XYZ at the time of their IPO. The proceeds generated from that IPO went to XYZ as the issuer. Bob now decides, however, that it would be beneficial for him to sell all of his XYZ shares in the market. This sale constitutes a secondary offering; because it is the second time those shares have been for sale in the market. The money he makes from the sale of his XYZ shares benefits him as well as the previous owner.
Why Does a Secondary Offering Matter?
The distinction between a secondary offering and an IPO must be understood beyond a simple transfer of stock ownership. The aim of ownership transfer in an IPO is to raise capital funding for this issuing company. A secondary offering simply transfers ownership between investors in the market place. In this sense, it is important to note that secondary offerings, while benefiting selling shareholders, do not financially benefit the issuing company.