Secondary market offering which refer to the registered sale of shares of stocks initially sold to the primary market is also known as secondary market offering. Initial public offering is different from secondary market offering in the sense that in initial public offering, proceeds from sale goes to the issuing company while in secondary market offering, the proceeds goes to the shareholders.
Secondary market offering should be distinguished from primary market offering. Primary market offering refers to initial offering of shares of stock to the market while secondary market offering refers to the subsequent sale of previously issued shares to the market. Considering that in the secondary market offering no new shares are created, it does not dilute the concentration of the existing stockholders interest. This is the reason why it is said to be 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.
In most cases, institutions avail of acquiring shares thru secondary market offering for purposes of increasing their shareholdings to gain control over the issuing company.
Secondary market offering is different from follow-on offering also known as dilutive secondary offering or subsequent offering. While no shares of stocks are created in the secondary market offering which in effect do not dilute the shareholders interest, however in follow-on offering, new shares are created by the issuing company and float it to market thereby diluting existing shares of the current stockholders. This is the reason why follow-on offering is also called dilutive secondary offering.
Secondary market offering refers to offering of shares of stock in the secondary market while follow-on offering or subsequent offering refers to subsequent offering after the initial offering to primary market or the succeeding offering by the issuer of its shares of stocks to the primary market. Hence, in short, any subsequent offering to the primary market after the initial one, which could be the second or third offering, 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.