Public offerings are significant financial events where companies sell equity shares or financial instruments to the public. This method helps companies raise capital for various purposes, such as operational expenses, expansion, or strategic investments. The U.S. Securities and Exchange Commission (SEC) plays a vital role in approving registrations for public offerings, and investment underwriters usually manage these transactions. There are two primary types of public offerings: initial public offerings (IPOs), where a company goes public for the first time, and secondary offerings, which allow firms to raise additional capital after the IPO. This article explores the concept of public offerings in detail.
What is a public offering?
A public offering is the sale of equity shares or other financial instruments, such as bonds, to the public with the primary goal of raising capital. This capital can be used to cover operational shortfalls, fund business expansion, or make strategic investments. The financial instruments offered to the public may include equity stakes like common or preferred shares, or assets that are traded as bonds.
The U.S. Securities and Exchange Commission (SEC) plays a critical role in the public offering process. They must approve all registrations for public offerings of corporate securities in the United States. Usually, an investment underwriter manages or facilitates public offerings.
Public offering explained
Generally, any sale of securities to more than 35 people is deemed a public offering, necessitating the filing of registration statements with the appropriate regulatory authorities. The issuing company and the investment bankers handling the transaction predetermine an offering price at which the securities will be sold.
The term “public offering” is equally applicable to a company’s initial public offering, as well as subsequent offerings. While public offerings of stock often receive more attention, this term encompasses debt securities and hybrid products like convertible bonds.
Initial public offerings and secondary offerings
An initial public offering (IPO) marks the first time a private company issues corporate stock to the public. Typically, younger companies seeking capital for expansion and large, established privately owned companies looking to go public as part of a liquidity event engage in IPOs. The process involves several key steps:
- An external IPO team is formed, comprising the lead underwriter, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts.
- Comprehensive information about the company is compiled, including its financial performance, operational details, management history, risks, and expected future trajectory. This information becomes part of the company’s prospectus, which is circulated for review.
- The financial statements undergo an official audit.
- The company files its prospectus with the SEC and sets a date for the offering.
A secondary offering is when a company that has already undergone an initial public offering (IPO) issues a new set of corporate shares to the public. There are two types of secondary offerings: non-dilutive and dilutive secondary offerings.
In a non-dilutive secondary offering, a company initiates a sale of securities in which one or more major stockholders sell all or a substantial portion of their holdings. The proceeds from this sale are paid to the selling stockholders. On the other hand, a dilutive secondary offering involves creating new shares and offering them for public sale.
Here is a list of the benefits and drawbacks to consider.
- Access to a significant pool of capital.
- Enhanced public awareness and credibility.
- Liquidity for existing shareholders.
- Increased regulatory compliance and reporting requirements.
- Potential dilution of ownership for existing shareholders.
- Loss of control and privacy for company founders.
Frequently asked questions
What is the main purpose of a public offering?
A public offering’s primary purpose is to raise capital by selling equity shares or financial instruments to the public.
How does the SEC play a role in public offerings?
The U.S. Securities and Exchange Commission (SEC) plays a crucial role by approving registrations for public offerings of corporate securities in the United States, ensuring transparency and compliance with regulations.
What is the difference between an initial public offering (IPO) and a secondary offering?
An IPO marks the first time a company offers its stock to the public. A secondary offering occurs when a company that has already gone public issues a new set of corporate shares to raise additional capital.
What are the benefits of a non-dilutive secondary offering?
In a non-dilutive secondary offering, existing major stockholders sell their holdings, providing liquidity and financial benefits to them without affecting ownership percentages for other shareholders.
Why would a company choose a dilutive secondary offering?
A company might opt for a dilutive secondary offering when it needs to create and sell new shares to raise capital, even if it results in dilution of ownership for existing shareholders.
- A public offering involves selling equity shares or financial instruments to the public to raise capital.
- Initial public offerings (IPOs) are the first time a private company goes public, while secondary offerings occur after the IPO to raise additional capital.
- Pros of public offerings include access to capital and enhanced credibility, but there are cons like increased regulatory requirements and potential dilution of ownership.
View article sources
- Stocks – University of North Texas
- Differences between an IPO, a SPAC, and a direct listing? – University of Kansas
- Inefficiency in the Market for Initial Public Offerings – Vanderbilt Law School
- Going Public: A Beginner’s Guide to Initial Public Offerings (IPOs) – SuperMoney
- Pre IPO Investing: Here’s How It Works – SuperMoney
- Initial Public Offering (IPO) – U.S. Securities and Exchange Commission