What Is a Spot Secondary?
The term spot secondary refers to the sale of securities that are already been issued. It doesn't require a Securities and Exchange Commission (SEC) registration statement. Distributions from these sales are normally paid out without any time delays. A spot secondary offering is typically presented to institutional investors instead of the general public and is closed the next business day after it is made. Investors in spot secondary trades typically expect an underwriting discount for executing the trade quickly.
- A spot secondary is the sale of securities that are already issued, usually to institutional investors rather than to the general public.
- This offering does not require a Securities and Exchange Commission registration statement.
- Distributions that result from these sales are normally paid out without any time delays.
- Investors in spot secondary trades typically expect an underwriting discount for executing the trade quickly.
How a Spot Secondary Works
As mentioned above, a spot secondary offering involves the sale of securities that are already issued. The term spot in financial markets is short for "on the spot” and refers to immediate cash transactions with no or little delay. In general, the term secondary refers to trades made between a buyer and seller in the financial market who are not the original issuers of the product.
These transactions are initiated by just one entity—usually, an institutional investor after an initial public offering (IPO) takes place. Companies often make a secondary stock offering after an IPO because they need to raise money, in which case new shares are issued. But in other cases, secondary offerings are held because major investors in the IPO are looking to sell.
Shares that are issued through a spot secondary offering are typically priced at a discount to institutional investors. This encourages participation in what are usually cash transactions that occur overnight. A managing underwriter, or book runner, generally acts as the agent for the firm in purchasing, carrying, and distributing the spot secondary offering.
By contrast, futures markets trade in the future value of a commodity, bond, or stock. For example, the secondary mortgage market is where mortgages that have been sold by the original lender are packaged and resold to investors. But in the context of stock shares, secondary offerings can mean both third-party sales and sales by the original company after the initial public offering (IPO).
Spot secondary trades are normally offered to institutional investors, which means that average investors are not privy to them.
A spot secondary offering is not registered with the SEC. Certain requirements must be met to avoid registration and therefore, offer a spot secondary offering. This includes making the offering to an accredited investor, such as an institutional investor.
But not all secondary share offerings are considered spot secondary. Conventional secondary offerings—namely, those that are sold to the general public—must be registered with the SEC, which can be a time-consuming process meant to protect retail investors from misrepresentation or even fraud.
As such, this kind of offering can typically be performed more quickly than other types of secondary offerings. But because the SEC has not condoned these offerings, spot secondary trades are generally limited to institutional investors, who presumably are more knowledgeable about the potential risks and rewards.