What Is a 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 public offering (FPO). New shares issued by blue-chip companies are considered seasoned issues. Outstanding bonds trading in the secondary markets are also called seasoned issues.
- A seasoned issue is when a publicly traded company issues new shares of stock to raise money.
- The company generally uses the money from the seasoned issue to pay down debt or to fund new projects.
- A seasoned issue can dilute the holdings of existing shareholders because it increases the total amount of shares on the secondary market, thus diluting or reducing the value of each share.
- Non-dilutive seasoned issues are when existing shareholders who hold large amounts of stock sell all or a portion of their stakes in a company.
- Existing shareholders may view a seasoned issue in a negative light and the news can cause the price of both the outstanding shares and the new shares to fall.
How a Seasoned Issue Works
Seasoned issues are handled by equity underwriters working on behalf of the company issuing the new shares. The company will base the price of the new shares on the market price of the outstanding shares. Typically, equity underwriters are investment banks that specialize in working with publicly traded companies to ensure the seasoned issue meets all regulatory requirements. In an effort to facilitate the sale of the new shares, the underwriters will also notify large institutional investors of the upcoming stock sale.
A seasoned issue should not be confused with an initial public offering (IPO). An IPO occurs when a private company transitions to a publicly traded company where investors can buy and sell shares on a stock exchange. The IPO represents the first time public investors can purchase shares of the company. A seasoned issue, on the other hand, occurs when the management of an existing publicly traded company decides to sell additional shares of stock to raise money.
Types of Seasoned Issues
Dilutive Seasoned Issues
A seasoned issue that consists of new shares can considerably dilute the holdings of existing shareholders because it increases the total amount of shares on the secondary market. Current shareholders will experience a reduction in their percentage of equity ownership in the company. As the company issues more shares, each existing shareholder owns a smaller part of the company, thus diluting or reducing the value of each share.
The dangers of share dilution can negatively impact the value of a shareholder's investment and lead to a decline in the company's share price as investors respond by selling-off the company. Subscription rights are one way a company can protect shareholders from some of the effects of dilution. Subscription rights give existing shareholders the right to purchase shares of the seasoned issue, often at a discounted price, before the company opens up the new shares to the broader market.
Non-Dilutive Seasoned Issues
Seasoned issues from existing shareholders, however, do not dilute existing shareholders as this scenario does not create additional shares. 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.
Criticism of Seasoned Issues
Companies will frequently issue new shares as a way to raise money to fund new projects or to pay down debt. Investors may construe a seasoned issue as a sign the company is having financial problems. They may see it as a signal the company is running short on cash. This news can cause the price of both the outstanding shares and the new shares to fall. Investor sentiment may turn negative against the company as existing shareholders begin to experience the financial impact of share dilution.
Also, selling large volumes of shares—especially one that's thinly traded—can create downward pressure on a stock's price. For these reasons, it's important for an investor to consider multiple angles of a company's financial health when considering buying into a seasoned issue.
Examples of a Seasoned Issue
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 Securities and Exchange Commission (SEC), and handle the sale. The company receives the funds from the sale of the securities and is then able to use those funds to build their factory. In this example, the seasoned issue was dilutive to existing shareholders.
Private investors can also initiate 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. This type of seasoned issue does not dilute outstanding shares.