Secondary Market Offering: What is it?

Registered sale of shares of stocks previously sold in the primary offering to the public is known as secondary distribution, more commonly known as secondary market offering. While in initial public offering the proceeds from the sale of shares of stocks goes to the issuing company, in secondary market offering, the money arising from the sale of the shares of stocks goes to the investors.

Aside from the aforementioned, secondary market offering differs from primary or initial public offering in the sense that primary or initial public offering is offered to the primary market while the secondary market offering refers to the subsequent offering of those shares initially offered to the primary market to the secondary market. It must be noted that no new shares are created in the secondary market offering which therefore do not dilute the interest of the existing shareholders. For his reason, secondary market offering is also referred to as non-dilutive.

One of the reasons why original stockholders resort to secondary market offering is to diversify their investment. Good example of secondary market offering of shares is the subsequent sale of shares acquired by the issuing companys directors and those closely related to it from the initial public offering. It must be noted that in the ordinary course of the initial issuance of shares, directors and those closely related to the issuing company are those who initially subscribed to the initial issuance of shares to public.

However, since the market price of the shares of stocks might already went up, those who initially subscribed to the initial public offering sell their stockholdings thru secondary market offering. This way, they gained from the subsequent sale of the shares plus the fact that they can now diversify their investments.

Institutions who intend to gain control over the issuing company are those who usually buy shares thru secondary offering in order to increase their shareholdings.

Follow-on offering, also known as dilutive secondary offering is different from secondary market offering. The two differ from each other in the sense that in secondary market offering, no shares are created thereby retaining shareholders interest, in short, non-dilutive. In follow-on however, since the issuing company creates new shares which are subsequently offered to market, the aforementioned result to the dilution of shareholders interest. For this reason, follow-on offering is also known as dilutive secondary offering.

To point out the difference between the secondary market offering and follow-on offering, it is important to give emphasis to the kind of market the aforementioned are offered. Secondary market offering is the subsequent offering for sale of shares in the secondary market while the follow-on offering is the subsequent initial offering of shares to the primary market. Hence, any offering of shares arising from subsequent initial issuance of shares , which may be second or even third, are referred to as follow-on offering.

To better understand the difference it is important to note the effect of making the secondary market offering and the follow-on offering to the company. Secondary market offering have no dilutive effect to the shareholders while the follow-on offering is dilutive. Another distinction is that the proceeds from sale of shares in the secondary market offering goes to the pocket of the stockholder while the proceeds from the sale of shares offered in the follow-on offering goes to the pocket of the issuer company.

The columnist of this exposition has located the creator of a PSSO by the name of Wade Entezar.