A secondary offering is the sale of new or closely held shares by a
company that has already made an initial public offering (IPO). There
are two types of secondary offerings. A non-dilutive secondary
offering is a sale of securities in which one or more major
stockholders in a company sell all or a large portion of their
holdings. The proceeds from this sale are paid to the stockholders
that sell their shares. Meanwhile, a dilutive secondary offering
involves creating new shares and offering them for public sale.
Non-Dilutive Secondary Offerings
A non-dilutive secondary offering does not dilute shares held by
existing shareholders because no new shares are created. The issuing
company might not benefit at all because the shares are offered for
sale by private shareholders, such as directors or other insiders
(like venture capitalists) looking to diversify their holdings.
Usually, the increase in available shares allows more institutions to
take non-trivial positions in the issuing company, which may benefit
the trading liquidity of the issuing company's shares. This kind of
secondary offering is common in the years following an IPO, after
termination of the lock-up period.
Dilutive Secondary Offerings
A dilutive secondary offering, also known as a follow-on offering or
subsequent offering, is when a company itself creates and places new
shares onto the market, thus diluting existing shares. This type of
secondary offering happens when a company's board of directors agrees
to increase the share float for the purpose of selling more equity.
When the number of outstanding shares increases, this causes dilution
of per-share earnings. The resulting influx of cash is helpful in
achieving the longer term goals of a company or it can be used to pay
off debt or finance expansion. Some shareholders shorter-term horizons
may not view the event as a positive.
A dilutive secondary offering usually results in some sort of drop in
stock price due to the dilution of per-share earnings, but markets can
have unexpected reactions to secondary offerings. For example, in
January 2018, the stock price of CRISPR Therapeutics A.G. saw a
one-day increase of 17 percent after the company announced a secondary
offering. Although the exact reason for the rapid increase can't be
known for sure, analysts suspect it was because investors thought the
announcement signaled something greater in the future, perhaps related
to the company's plans to use the additional capital to fund further