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After a company issues shares in the publicly traded markets, it might find that it needs to raise additional capital or money for some business reason. One way to accomplish this is to launch a secondary offering, in which more shares, or stocks, become available for investors, both retail and institutional, to buy and sell in the public markets. There are advantages and disadvantages to doing this.
A company that has already issued stock in a debut initial public offering (IPO) is eligible to sell additional shares in a secondary offering. The issuing corporation, typically the chief financial officer, will work together with an investment bank to determine the appropriate number of shares to sell and also the market price at which to sell each individual share of stock. Incidentally, this investment bank might receive certain privileges to purchase shares in a secondary offering at a discount price.
In the United States, the number of shares that can be sold in such a transaction are pre-determined based on a prospectus that a company files with the regulatory body in the region at the time of the IPO. These types of stock sales must be approved by a company's board of directors, however. Typically, a company will make an announcement detailing the components of the sale, such how many shares will be sold and for how long.
There could be a number of reasons driving a company's management team to issue shares in a secondary offering. For instance, a company might have an acquisition in its sights but not enough capital on hand to buy the business it wants to integrate into its own entity. One way to raise the necessary funds is to launch a secondary offering.
Perhaps a company wants to reduce its debt load and cannot generate enough revenues or sales to do this. A secondary offering can be an appropriate solution. Or, if a business such as a pharmaceutical operation needs additional capital to pursue clinical trials for new drug development, a capital-intensive or expensive process, then issuing securities in the financial markets can help.
A primary disadvantage for a secondary offering is tied to the existing shareholders. Investors who purchase stock become part owners in that company, and they own a share of the company depending on how much stock they purchase. That percentage ownership becomes diluted when there is a secondary offering, however, because the size of the overall pool from which shares become available increases. Shareholders often are granted rights, such as the ability to vote on major corporate events depending on the size of an investment, so these privileges similarly can become diluted when the number of overall securities increases.