Secondary Distribution
A Secondary Distribution, also known as Secondary Offering, refers to the public sale of previously issued securities that are held by large investors. These investors might include corporations, institutions, or other affiliated persons. This type of transaction contrasts with a Primary Distribution, where the securities sold are newly issued and sold by the issuing corporation to raise new capital.
Secondary distributions are usually facilitated by investment banks, which act as intermediaries to find buyers for the securities. In these transactions, the issuer does not receive any proceeds because the securities involved were already issued and are simply being redistributed in the market.
Examples
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Institutional Investor Sale:
- An institutional investor holding a large stake in a company decides to liquidate a portion of its holdings. Instead of selling shares directly on the open market, the investor utilizes an investment bank to manage the secondary distribution.
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Corporate Challenge:
- A corporate shareholder, such as a venture capital firm or an original founder who holds a significant equity stake in a company, may choose a secondary distribution to sell off shares after the company’s initial public offering (IPO) period.
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Affiliated Person Distribution:
- An affiliated person, such as an executive or board member, might conduct a secondary distribution to divest shares for portfolio diversification or liquidity needs.
Frequently Asked Questions
What is the difference between a primary and a secondary distribution?
- Primary Distribution involves the issuance of new shares by the issuing corporation to raise new capital. The proceeds go to the issuing company.
- Secondary Distribution involves the sale of existing, previously issued shares by large investors. The proceeds go to the selling investors, not the issuing company.
How is a secondary distribution conducted?
The process generally involves an investment bank that acts as an underwriter. The bank buys the shares from the seller at a negotiated price and resells them to public investors, often at a slight premium.
Why do large investors opt for secondary distribution?
Large investors, such as institutions or corporate insiders, may choose this method to quickly and efficiently sell large blocks of shares without disrupting the market price. It also provides them with liquidity.
Do secondary distributions affect the company’s stock price?
While the company’s total amount of outstanding shares remains unchanged, large sales might influence the stock price due to changes in supply and demand dynamics.
Are there any regulations governing secondary distributions?
Yes, secondary distributions must comply with regulatory requirements, including disclosures mandated by entities such as the Securities and Exchange Commission (SEC) in the United States.
Related Terms
- Primary Distribution: The initial offering of new securities directly from the issuer to the public, with proceeds going to the issuing entity.
- Underwriter: A financial intermediary that assesses the risk and determines the price of securities, often facilitating transactions such as secondary distributions.
- Prospectus: An official document outlining the details of a securities offering, including risk factors, financial statements, and transaction terms.
Online Resources
Suggested Books for Further Studies
- Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum
- The New IPO: Factbook and Behavioral Perspectives on Initial Public Offerings by Tanja Pieper
- The Intelligent Investor by Benjamin Graham
- Security Analysis by Benjamin Graham and David Dodd
Fundamentals of Secondary Distribution: Investment Banking Basics Quiz
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