Quick Answer
A secondary offering is the sale of securities by existing shareholders, not the company, to the public. The company receives no proceeds and no new shares are created, so the offering is not dilutive. It can happen any time after the IPO, though any seller still bound by a lock-up must wait for it to expire.
The exam builds this concept directly on the IPO: shares still move through broker-dealers to the public, but the answer to "who gets paid" flips depending on who is selling.
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 |
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
Exam Tip: Gotchas
A combined offering still splits cleanly by proceeds: the primary portion's proceeds go to the company, and the secondary portion's proceeds go to the selling shareholders in the same transaction. Only the primary portion dilutes existing shareholders.
What Should You Check on Exam Day?
- A secondary offering pays existing shareholders, not the company; a primary offering pays the company
- No new shares means a secondary offering is not dilutive; a follow-on offering issuing new shares is dilutive
- "Secondary offering" in a headline is not proof of the legal definition; check who actually receives the proceeds
- A single offering can mix primary and secondary portions, each with its own recipient of proceeds