Most Retail Investors don’t know about, or at least have never participated in a Secondary Offering. Similar to an Initial Public Offering, a Secondary Offering, also called a Follow-on Offering, is when an already public company registers additional shares for sale in the public market. A spot offering is when a block of already registered shares becomes available. Secondary Offering proceeds can be used to fund operations, make an acquisition, or pay off debt. Sometimes a large shareholder is liquidating shares and a Secondary Offering or Spot Offering is a way to liquidate shares at a discounted price without hurting the current market price.
Here are five things you need to know about Secondary Offerings:
1) Know How It Works
Let’s start by explaining how an IPO works. With an IPO, the Underwriter and Issuer emerge from the Quiet Period and go into the Registration Period. This gives the underwriters anywhere from 3 to 4 weeks to build interest across a base of Institutional and Retail investors. You’ll often see companies engage in a Road Show during this period. At the end of that process, the evening before the company is to go public, the Underwriter will decide which investors will receive an allocation, and how much allocation.
With Secondary or Spot Offerings, the process is much faster. Instead of 3 to 4 weeks, the entire offering is marketed in just a few days. Spot or overnight offerings are announced after the market closes and allocated to investors in just a few hours. Secondary or spot offerings are generally priced below the closing price of the stock that day.
2) Know the Advantages
In terms of price per share, Secondary Offerings are usually, but not always, priced below the closing price that day, which makes them attractive to investors from a pricing perspective.
Unlike IPOs, which do not have a trading history, Secondary Offerings often have years of trading history and financial records for investors to make an informed decision.
3) Know the Risks
Secondary Offerings can result in a lower trading price the next day. So while an investor gains the benefit of a discount to market price, the next day the stock could open at or below the secondary offering price. For this reason, Secondary Offerings are not attractive for very short-term traders or Flippers. They are generally more attractive for buy and hold investors that like the issuer or the industry.
4) Know How to Access Them
Because of the short timeframes and lack of marketing, Secondary Offerings are, generally speaking, more difficult for the Underwriter to find buyers versus an IPO. It’s also very difficult for the Underwriter to raise awareness of the offering because of the short time frame, so most Retail Investors never hear about them. This means that it is often easier to receive an allocation in Secondary Offerings, provided you hear about them in the first place and have figured out a way to gain access.
ClickIPO has solved this problem by communicating Secondary Offerings via push notification to subscribed users of our mobile app. This allows investors to receive timely information given them the ability to participate in a secondary or spot offering even if they only have a few hours to make a decision and place an order.
Risk of Investing in Initial Public Offerings (“IPOs”)
There are specific risks in investing in an Initial Public Offering (“IPO”). Among other things, the stock has not been subject to market valuation. Those risks are described at length in the prospectus, and we urge you to read the prospectus carefully to understand those risks before investing. An IPO is the first sale of stock by a private company to the public and may not be suitable for all investors. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. IPOs are a risky investment. For even experienced investors, it can be difficult to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values. Read more information regarding the significant risks associated with investing in IPOs.