What is Seasoned Issue?
A seasoned issue is an issue of additional securities from an established company whose securities already trade in the secondary market. A seasoned issue is also known as a "seasoned equity offering" or "follow-on offering." New shares issued by blue-chip companies are considered seasoned issues. Outstanding bonds trading in secondary markets is also called seasoned issues.
BREAKING DOWN Seasoned Issue
Seasoned issues are handled by underwriting firms in much the same way as initial public offerings, except that the price of the new shares is based on the market price of the outstanding shares. Investors may construe a seasoned issue as a sign that a company is having financial problems. This news can cause the price of both the outstanding shares and the new shares to fall.
Seasoned issues that consist of new shares being created can considerably dilute the holdings of existing shareholders because it increases the total amount of shares on the secondary market. Seasoned issues from existing shareholders, however, do not dilute existing shareholders. That's why it's important to know who the seller of a seasoned issue is. In many cases, seasoned issues from existing shareholders involve founders or other managers (such as venture capitalists) selling all or a portion of their stakes in a company.
This is common in situations where a company's original IPO included a "lock-up" period, during which the founding shareholders were disallowed from selling their shares. Seasoned issues, thus, are a preferred method for founding shareholders to monetize their positions. Seasoned issues may also signal that a company is running short on cash, so it's important for an investor to consider multiple angles of a company's financial health when considering buying into a seasoned issue. Also, selling large volumes of shares – especially one that's thinly traded – can create downward pressure on a stock's price.
Seasoned Issue Example
Consider Company ABC, a public company that wants to sell additional shares in a seasoned issue in order to raise money for a new factory. To accomplish this outcome, Company ABC hires an investment bank to do the underwriting, register it with the SEC and handle the sale. The company receives the funds from the sale of the securities. Private investors can also affect a seasoned issue. Consider a wealthy investor with a very large block of Company XYZ shares, maybe 500,000 shares. In this type of seasoned issue, the private investor will receive the proceeds from the sale of the shares instead of the public company – but it also won't dilute outstanding shares.