Securities Markets - Secondary Offerings and Shelf Distributions

Secondary Offering
A secondary offering, also called a secondary distribution, is an offering that, despite requiring a registration statement, is not held on behalf of the issuer. Instead, it is a large block of shares previously issued to the public and now owned by one shareholder.

In a secondary distribution this shareholder, not the issuing company, receives the proceeds. A secondary offering is done at the prevailing market price and must be done without any market manipulation. A block is usually defined as at least 10,000 shares of stock or $200,000 in bonds.

Shelf Distributions
As you can see by all these exceptions, registration is a time-consuming process, and there is no guarantee that the market conditions that enticed a company to raise capital will be the same by the time the securities are actually offered.

Increasingly, offerings are being registered as shelf distributions, thus enabling companies to register equity or debt which they have no immediate plans to issue. When market conditions change and either the issuer's stock price has risen unexpectedly or interest rates have sharply declined, the issuer is in a position to get new securities on the Street within the week.

Determining the Offering Price
Of course, before the shares can be sold to the public, a price must be settled on. The offering price is the sum of the following:

  • proceeds paid to the issuer,
  • underwriter's fee, and
  • management fee paid to the lead underwriter.

The underwriter's and management fee are known collectively as the gross spread.

Selling Group
If, after the syndicate is established, more investment banks want to participate in the offering, a broader selling group is formed. Members of the selling group buy only those shares they are sure they can sell, and so bear little risk. They buy shares from underwriters and are reimbursed with a selling group concession paid out of the underwriter's fee. If there are no more shares left to allocate to the selling group, an underwriter might still sell its own shares to a selling group member at the full public share price minus a reallowance discount.

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