A secondary offering involves companies that sell their shares after completing an IPO. In secondary offerings, the capital gained from selling the shares goes to the shareholder rather than the company. Shares involved in secondary offerings have been sold a second time─first to the shareholder, and then to other investors.
Non-Dilutive and Dilutive Offerings
Secondary offerings are separated into two types: dilutive and non-dilutive. In a dilutive offering, a company creates new shares and their old shares dilute; dilution occurs when a company’s shares increase and as a result, the percentage of ownership of shares decreases. Investment banks (IBs) help you sell these new securities. These offerings are an effective way to raise capital, thus increasing a company’s overall value after your IPO. Often, companies funnel the raised capital back into the business to facilitate its growth.
In a non-dilutive offering, major shareholders sell their stock in a company after completion of an IPO. Non-dilutive offerings do not involve the creation of new shares; instead, shareholders sell their existing stock hoping to gain a profit. Also keep in mind that this type of secondary market offering does not benefit the issuer. Rather, the shareholder profits by selling the shares they bought from the issuing company to another investor. Non-dilutive secondary offerings are a viable exit strategy for current investors in the issuing company. Those who own existing or used shares that they acquired on the primary market, sell their stock to other investors on the secondary market to raise capital.