What Is a Primary Distribution?

In finance, the term primary distribution refers to the original sale of a security issue to the investing public. One of the most well-known examples of a primary distribution is the initial public offering (IPO), in which a new company sells its shares for the first time. A primary distribution may also involve the issuance of preferred shares, debt securities, or structured notes, among others. A primary distribution is similar in many ways to a primary offering and the two terms are often used interchangeably.

The proceeds from a primary distribution are received directly by the issuer of the security in question. For example, in the case of an IPO, the newly-listed company receives the proceeds from the sale of stock to the public, raising equity capital for itself.

Key Takeaways

  • A primary distribution is an initial sale of securities on the secondary market, such as in the case of an IPO.
  • By contrast, a secondary distribution refers to the sale of existing securities among buyers and sellers on the secondary market.
  • Unlike secondary distributions, primary distributions are a direct source of funds for the company issuing securities to raise capital.

How Primary Distributions Work

Primary distributions are a critical component of the overall financial markets, as they are the primary mechanism whereby issuers raise capital from investors in the public market. By contrast, secondary distributions do not raise capital for issuers because their proceeds are paid only to the current owner of those securities.

Unlike primary distributions, secondary distributions do not increase a company’s shares outstanding. This is because they do not involve the creation of any new shares. Instead, the same shares which were first issued in the IPO are simply changing hands among different investors. Nevertheless, secondary distributions can have an effect on the company in question because the price at which the trades are made can influence the company’s overall share price.

There is also an important distinction between the terms “secondary distribution” and “secondary offering”. Whereas a secondary distribution only refers to the sale of an existing block of shares, a secondary offering consists of the issuance of new shares. In this sense, a secondary offering can be viewed as a “second IPO”. For this reason, secondary offerings will increase the shares outstanding of a company, which can result in equity dilution for the existing shareholders.

Real World Example of a Primary Distribution

To illustrate, consider the case of a newly-listed company. During its IPO, the company received the proceeds from the initial sale of its shares to investors. However, if those same investors then want to sell their shares to someone else, that second sale would be considered a secondary distribution and would not lead to any direct cash inflow to the company.

Oftentimes, secondary distributions are made by company officers, high net-worth (HNW) individuals, or institutional investors who hold large blocks of an existing security. For example, a secondary distribution might be made by a venture capital (VC) firm that helped fund a recently listed company in the years prior to its IPO. Now that the company is publicly listed, the VC firm may wish to cash out on their position by selling their shares through a secondary distribution.