Equity Public Offering

The whole unit on one sheet: the IPO process, underwriting commitments, primary versus secondary proceeds, and how SPACs reach the public markets.

The One-Liners That Win Points

• Who gets the money is the core question: primary offering (IPO, follow-on) means the issuer receives proceeds; secondary offering means the selling shareholders do.
• The underwriter (in consultation with the issuer) sets the IPO offering price before trading begins, not the market and not the Securities and Exchange Commission (SEC).
• Firm commitment: underwriter buys the entire issue and bears the risk of unsold shares (most common for IPOs).
• Best efforts: underwriter acts as agent, sells what it can, and returns unsold shares to the issuer (issuer bears the risk).
• All-or-none is a type of best efforts (entire issue must sell or the offering is canceled, funds held in escrow), NOT firm commitment.
• The lock-up period is a contractual agreement between insiders and the underwriter, NOT an SEC rule.
• A secondary offering creates no new shares, so it is not dilutive; a follow-on offering issues new shares, so it is primary and dilutive.
• A SPAC goes public first as a shell, then uses the proceeds to acquire a private target through the de-SPAC merger.

Numbers to Lock In

Top Gotchas

• All-or-none is best efforts, not firm commitment: the underwriter never buys the shares; the deal simply requires 100% subscription or it is canceled.
• The lock-up is contractual, not a government rule. FINRA imposes a 180-day lock-up on underwriter compensation securities, but the insider lock-up is an agreement with the underwriter.
• "Secondary offering" is loosely used in the media for any post-IPO offering; the exam uses the precise definition, so always ask who gets the money.
• A follow-on (seasoned equity) offering is primary and dilutive, not secondary, even though it happens after the IPO.
• SPACs are not penny-stock issuers: they price above $5 and raise more than $5 million in firm commitment, so the penny-stock blank-check escrow rule does not apply to them directly.
• The sponsor promote is the hidden dilution: roughly 20% of shares at a nominal cost dilute other shareholders even if the acquisition succeeds.

Initial Public Offering (IPO)

• The first sale of a company's stock to the public, turning a private company into a publicly traded one.
• The issuer receives the proceeds, so an IPO is a primary offering; it must register with the SEC (Form S-1) before shares are sold.
• Underwriters (investment banks) run the process: due diligence, SEC registration, pricing, and distribution through a syndicate of broker-dealers.
• Role match: issuance and regulatory filings go to the issuer; distributing securities goes to the broker-dealer; effecting transactions as an individual is the agent; trading for its own account is the dealer; rating the securities is the rating agency (none of the other four).
• Standby underwriting is used in rights offerings: the underwriter buys any shares existing shareholders do not purchase.
• IPO pricing is uncertain: the offering price is set before trading, but first-day market price can diverge sharply.

Secondary Offering

• The sale of securities by existing shareholders (not the company) 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 it is not dilutive and can occur any time after the IPO.
• Typical sellers: founders, early investors, officers and directors after lock-up, venture capital or private equity firms, and large institutional holders.
• A follow-on (seasoned equity) offering issues new shares, is primary, and is dilutive; some offerings combine a primary and a secondary component.

SPACs and Blank-Check Companies

• A Special Purpose Acquisition Company (SPAC) is a shell with no operations that raises capital through an IPO to acquire or merge with a private company; investors buy in without knowing the target, so it is a blank-check company.
• Steps: SPAC IPO, proceeds held in a trust account (typically U.S. Treasuries), target search (18 to 24 months), de-SPAC merger that takes the target public, or liquidation with funds returned if no deal closes.
• Key terms: sponsor (runs the SPAC, gets founder shares), promote (roughly 20% of post-IPO shares at nominal cost), trust account (escrow), redemption right (redeem for pro-rata trust share if the target is not approved).
• Investor risks: uncertain target, dilution from the sponsor promote, potential post-merger underperformance, capital locked for up to 18 to 24 months, and limited transparency.
• The SEC's penny-stock blank-check escrow rule covers blank-check companies offering penny stocks (below $5): funds held in escrow, a post-effective amendment upon an acquisition agreement, and funds returned within 18 months if no acquisition. SPACs price above $5, so it does not apply to them, though they adopt similar protections voluntarily.

Memory Aid: SPAC Spelled Out

SPAC = Shell company Purchases Another Company. The SEC's penny-stock escrow rule covers penny-stock blank checks only, and SPACs price above $5, so the rule does not apply.

One-Breath Recap

An Initial Public Offering (IPO) is a company's first stock sale, a primary offering where the issuer gets the proceeds and the underwriter (with the issuer) sets the price before trading. Underwriting commitments turn on who bears the risk of unsold shares: firm commitment puts it on the underwriter, while best efforts, all-or-none, and mini-maxi leave it with the issuer, and the insider lock-up is contractual, not an SEC rule. A secondary offering is existing shareholders selling their own shares, so the company gets nothing and it is not dilutive, unlike a dilutive primary follow-on offering. A Special Purpose Acquisition Company (SPAC) is a shell that raises IPO money into trust, hunts a target for 18 to 24 months, then merges via de-SPAC or liquidates, with the sponsor's roughly 20% promote as the hidden dilution and the penny-stock escrow rule not applying since SPACs price above $5. Keep asking who gets the money and who bears the risk, and this unit answers itself.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Equity Public Offering unit for the complete lesson.