Quick Answer
An Initial Public Offering (IPO) is a company's first stock sale to the public; the issuer receives the proceeds, so it is primary. A secondary offering is existing shareholders selling their own shares, so they get the money and it is not dilutive. A Special Purpose Acquisition Company (SPAC) is a shell that raises capital then buys a private target.
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
| Item | Value |
|---|---|
| IPO registration statement form | Form S-1 |
| Lock-up period (typical) | 90 to 180 days (180 most common) |
| FINRA lock-up on underwriter compensation securities | 180 days |
| SPAC target-search window | typically 18 to 24 months (set by governing documents) |
| SPAC sponsor promote (founder shares) | typically 20% of post-IPO shares |
| Penny-stock threshold | below $5 (this rule's $5-price exclusion does not apply) |
| Penny-stock blank-check qualifying-acquisition threshold | at least 80% of maximum offering proceeds |
| Penny-stock blank-check qualifying-acquisition consummation deadline | 18 months (then 5 business days to refund) |
| SPAC's exclusion from penny-stock status | exchange listing (not share price) |
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.
- An exchange-listed SPAC is not a penny-stock issuer: its exchange listing (not its share price) excludes it from the penny-stock definition, so the penny-stock blank-check escrow rule does not apply to it 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 (typically 18 to 24 months, set by the SPAC's governing documents), 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 or trust account), redemption right (redeem for pro-rata trust share when a de-SPAC transaction is proposed, regardless of how the investor votes on the target).
- Investor risks: uncertain target, dilution from the sponsor promote, potential post-merger underperformance, and capital locked for typically 18 to 24 months.
- The SEC's penny-stock blank-check escrow rule covers blank-check companies offering penny stocks (below $5, and this rule's usual $5-price exclusion does not apply): funds held in escrow or a trust account, a qualifying acquisition worth at least 80% of maximum offering proceeds, written purchaser reconfirmation, and funds returned (within 5 business days) if no qualifying acquisition is consummated within 18 months. An exchange-listed SPAC is excluded from the penny-stock definition through its exchange listing, not its price, so the rule does not apply to it, though SPACs adopt similar protections voluntarily.
Memory Aid: SPAC Spelled Out
SPAC = Shell company Purchases Another Company. The SEC's penny-stock escrow rule turns off its usual $5-price exclusion; an exchange-listed SPAC instead relies on the exchange-listing exclusion to avoid penny-stock status.
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 typically 18 to 24 months, then merges via de-SPAC or liquidates, with the sponsor's roughly 20% promote as the hidden dilution.
The penny-stock escrow rule does not apply to an exchange-listed SPAC, since its exchange listing, not its price, excludes it. 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.