Secondary Offering
Now that you understand how a company first goes public through an Initial Public Offering (IPO), let's look at what happens when existing shareholders want to sell large blocks of stock to the public.
What Is a Secondary Offering?
- Secondary offering: The sale of securities by existing shareholders (not the company itself) to the public
- Also called a secondary distribution
- The company does NOT receive the proceeds; they go to the selling shareholders
- No new shares are created, so the offering is not dilutive to existing shareholders
- Can occur any time after the IPO
Who sells in a secondary offering:
- Company founders and early investors
- Officers and directors (after lock-up expires)
- Venture capital or private equity firms cashing out their positions
- Large institutional holders reducing their stake
Primary vs. Secondary: Who Gets the Money?
This is one of the most frequently tested distinctions on the Series 66 exam.
| Feature | Primary Offering | Secondary Offering |
|---|---|---|
| Who sells | The company (issuer) | Existing shareholders |
| Who receives proceeds | The company | Selling shareholders |
| New shares created? | Yes | No |
| Dilutive? | Yes (more shares outstanding) | No (same shares, different owners) |
| Examples | IPO, follow-on offering | Insider sell-down, block trade |
Think of it this way: In a primary offering, the company is the seller and pockets the cash. In a secondary offering, an existing shareholder is the seller and pockets the cash. Same stock, different seller, different destination for the proceeds.
Exam Tip: Gotchas
The term "secondary offering" is sometimes loosely used in the media to describe any stock offering after the IPO, including follow-on primary offerings where the company issues new shares. The exam uses the precise definition: primary = issuer receives proceeds, secondary = selling shareholders receive proceeds. The key question is always: who gets the money?
Follow-On Offering vs. Secondary Offering
These two terms are easy to confuse but have different meanings:
-
Follow-on offering (seasoned equity offering): The company issues new shares after the IPO to raise additional capital. This is a primary offering because the issuer receives the proceeds. It is dilutive because new shares increase the total shares outstanding.
-
Secondary offering: Existing shareholders sell their own shares. The company receives nothing. It is not dilutive because no new shares are created.
Some offerings combine both:
- A company might issue new shares (primary) while insiders simultaneously sell existing shares (secondary) in the same offering
- This combined structure is common in follow-on offerings