Types of offerings

Primary market offerings can take several forms, but we’ll focus primarily on two for the SIE exam: IPOs and APOs.

We’ve discussed initial public offerings (IPOs) throughout this material, which occur when an issuer sells a security for the first time to the public. Common stock IPOs from larger companies are extensively covered in financial media outlets. For example, Uber’s IPO in 2019 garnered a lot of attention and raised $8.1 billion for the company. While Uber sold securities previously through private placements, its IPO was the first time its shares were offered to the general investing public.

Other offerings may occur after a security is issued in the primary market and begins trading in the secondary market. A follow-on offering, essentially “IPO part II” (or part III, IV, etc.) and also known as an additional public offering (APO), involves the issuer offering more shares in the primary market after the IPO. In most scenarios, issuers do not sell all possible shares in their IPO. This allows more shares to be sold and more capital to be raised in the future.

A secondary offering can also occur, which may not involve the issuer. Instead, large shareholders offer shares they obtained from the issuer. These are often officers or directors of the issuer that accumulated shares through their employment.

Let’s explore an issuer that’s been involved in all the transactions discussed above. Meta Platforms, Inc. (ticker: META), formerly known as Facebook, initially launched as a company in 2003. After gaining some success and raising money from private investors, the company raised $16 billion from investors in its 2012 IPO. After the IPO, the stock began trading in the secondary market on the NASDAQ exchange (we’ll learn more about exchanges in a future chapter). Roughly a year after its IPO, the company performed its first follow-on offering, raising roughly an additional $1.5 billion. A secondary offering occurred simultaneously as Mark Zuckerberg (CEO of Meta) sold over $2 billion of stock he personally owned.

Test questions may focus on the difference between a primary and secondary offering. The key differentiator is what party receives the proceeds of a sale. A primary offering, which includes IPOs and APOs, results in the issuer receiving the sales proceeds (e.g., Meta sells shares in an IPO, raising $16 billion). A secondary offering results in a party other than the issuer receiving the sales proceeds (e.g., Mark Zuckerberg sells personally-owned shares in a secondary offering).

PIPES

A PIPE (Private Investment in Public Equity) offering is a private transaction of a publicly traded company at a discount to the current market price. Companies typically use PIPE offerings to raise capital quicker and cheaper than an IPO, and are most common during market downturns. To help protect the security’s market value, these deals often include a lock-up period of six to twelve months, during which investors cannot sell their shares. Since PIPES are private placements, the investor must be accredited and is often an institution such as a private equity firm or fund.