What Is an Offering?
An offering is the issue or sale of a security by a company. It is often associated with an Initial Public Offering (IPO), where a company’s stock becomes available for purchase by the public for the first time. However, offerings can also involve the sale of bonds.
An offering is sometimes referred to as a securities offering, investment round, or funding round. Unlike other funding rounds (like seed rounds or angel rounds), an offering involves selling stocks, bonds, or other securities to investors to generate capital.
Key Takeaways
- An offering refers to when a company issues or sells a security.
- It is commonly associated with an initial public offering.
- IPOs can be risky because predicting how the stock will perform on its initial day of trading is difficult.
How an Offering Works
Usually, a company will make an offering of stocks or bonds to the public to raise capital to invest in expansion or growth. There are also instances when companies offer stock or bonds due to liquidity issues, where they might not have enough cash to pay their bills. Investors should be cautious with this type of offering.
When a company initiates the IPO process, a specific sequence of events takes place. First, an external IPO team is formed, which includes underwriters, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts. Next, detailed information about the company, like financial performance and expected future operations, is compiled into the company prospectus, which is circulated for review.
Sometimes, companies issue a shelf prospectus, outlining the terms of multiple types of securities they expect to offer over the next several years. Then, the financial statements undergo an official audit. The company files its prospectus with the SEC and sets a date for the offering.
Why IPOs Are Risky
IPOs and other types of stock or bond offerings can be risky investments. Individual investors often find it tough to predict what the stock will do on its initial day of trading. Additionally, most IPOs are for companies experiencing a transitory growth phase, which adds to the uncertainties regarding their future values.
IPO underwriters work closely with the issuing company to ensure the offering goes well. They aim to meet all regulatory requirements and reach out to a network of investment organizations to gauge interest and set the offering price. The level of interest received helps the underwriter set the price. The underwriter also guarantees that a specific number of shares will be sold at the initial price and will purchase any surplus.
Secondary Offerings
A secondary market offering involves a large block of securities, previously issued and now offered for public sale. These blocks often come from large investors or institutions, and the sale proceeds go to these holders, not the issuing company. This type of offering, also called a secondary distribution, differs significantly from initial public offerings, requiring much less background work.
Non-Initial Public Offerings vs. Initial Public Offerings
Sometimes an established company will make offerings of stock to the public, but these offerings are not the company’s first exposure to public sale of securities. Such offerings are known as non-initial public offerings or seasoned equity offerings.
Related Terms: initial public offering, secondary market offering, securities, investment, stock performance, IPO risks.
