An initial public offering or secondary offering can finance a business or let an owner cash out. A special purpose acquisition company offering can fund the search for a business. Your recommendation starts by identifying which transaction your customer is buying.
You need to know whose stock reaches the public and where the purchase money goes. A public offering makes securities available for sale to public investors. An initial public offering (IPO) is a company's first public offering of stock. The company issuing the stock is the issuer.
An initial public offering may sell newly issued shares, existing shareholders' shares, or both. Newly issued shares create additional ownership interests, and their proceeds go to the company. Existing shares already belong to someone, such as a founder or early investor. Their sale proceeds go to that selling shareholder.
These distinctions matter when you explain why the company is going public. An initial public offering consisting entirely of existing shareholders' shares can create public ownership without raising new capital for the company.
Common mistakes
- Treating all proceeds alike. In a $7.5 million mixed offering with $2.5 million of shareholder resales, company proceeds are $5 million before expenses.
- Adding resold shares again. Selling 100,000 existing shares does not add 100,000 to shares outstanding. Add only the newly issued portion.
- Treating effectiveness as an investment verdict. An effective registration statement does not establish that a $25 offering price is fair or that disclosures are accurate.
Bottom line
- An IPO is a company's first public stock offering and may include new shares, existing shares, or both.
- Newly issued shares raise company capital and dilute nonparticipating holders' percentage ownership.
- Sales of existing shares pay selling holders and do not themselves increase shares outstanding.
- Registered sales require effectiveness and compliance with prospectus requirements; registration does not establish investment merit.
Exam shortcut
Start with the shares, then follow the money. Underline “newly issued” and “selling shareholder” before choosing who receives proceeds. For ownership calculations, write the outstanding total first. Cross out resold shares as an addition to that denominator. When a question mentions trust protection, compare the client's actual purchase price with the redemption amount before selecting a loss figure.
The full lesson (about 2,788 words, 19 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- B5
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