IPO vs. Seasoned Issue: An Overview

An initial public offering (IPO) is when a company offers ownerships shares of stock or debt securities to the public for the first time in an attempt to raise capital. On the other hand, if a company is already listed on stock exchanges and simply decides to release additional stock or debt instruments, it is considered a seasoned issue.

IPO

When a privately-owned company decides to raise capital by offering shares of stock or debt securities to the public for the first time, it conducts an initial public offering, at which point it becomes a publicly traded company.

If and when a company decides to sell shares of its stock to the public to raise money for operations or other uses, it engages the services of one or more investment banks to act as the underwriters responsible for managing the underwriting process of the IPO.

The underwriters help the company organize and file information that is required by regulators; they also create a prospectus disclosing all relevant information about the company (covering investment basics regarding finances and operations) and making it available to the public.

Companies will typically list via an IPO or release additional ownership shares in order to fund an expansion they don't currently have the cash to cover themselves.

Underwriters assess the value of the stock to be issued and, at the same time, determine the initial price the new shares sell for to the public. Once the initial shares are purchased in the IPO, they start to trade among the public in the secondary market.

Seasoned Issue

When an existing publicly traded company decides to raise additional capital by selling additional shares of its stock or debt instruments to the public, the share offering is considered a seasoned issue.

Seasoned issues, also known as secondary offerings or subsequent offerings, involve the issuance of additional shares of a publicly traded company to the public. Given that the company's shares already trade in the secondary market, the underwriters handling the seasoned or secondary offering price the shares at the prevailing stock market price on the day of the offering.

Key Takeaways

  • IPOs occur when a privately-owned company decides to raise revenue, offering ownership shares of stock or debt securities to the public for the first time.
  • A seasoned issue occurs when a company that was previously listed releases additional shares or debt instruments.
  • Depending on their objectives, companies will usually seek private equity funding before listing their shares in an IPO. It isn't uncommon to see multiple "rounds" of funding before listing.

Special Considerations

All companies in the U.S. start as privately-owned entities, generally created by an individual or a group of founders. The owners typically hold all or most of the stock, which is authorized within the company's articles of incorporation, a legal instrument created when the corporation is first established.

To fund operations during the early years, the owners typically put up their own money (known as self-funding), seek venture capital backing, and/or obtain loans or other forms of private financing from banks or other financial institutions.

However, either due to scale or spending practices, a company may decide to go public with their shares, or offer new ones. This practice can raise more capital, but companies consider the image of an offering almost as much as the capital itself, as the opinion of a company can change drastically due to a mistimed IPO or seasoned issue.