Types of offerings

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

An initial public offering (IPO) happens when an issuer sells a security to the public for the first time. Common stock IPOs from large companies are widely covered in the financial media. For example, Uber’s IPO in 2019 drew significant attention and raised $8.1 billion for the company. Uber had previously sold securities through private placements, but its IPO was the first time its shares were offered to the general investing public.

Once a security has been issued in the primary market and begins trading in the secondary market, additional offerings can still occur.

A follow-on offering, also called an additional public offering (APO), is a new primary market sale of shares after the IPO (you can think of it as “IPO part II,” and it can happen more than once). In many IPOs, the issuer doesn’t sell all the shares it’s authorized to issue. Holding shares back gives the issuer the option to sell more shares later and raise additional capital.

A secondary offering can also occur, and it may not involve the issuer at all. Instead, large shareholders sell shares they already own. These sellers are often officers or directors who accumulated shares through their employment.

Here’s a real-world example that includes each of these transactions. Meta Platforms, Inc. (ticker: META), formerly known as Facebook, launched in 2003. After raising money from private investors, the company raised $16 billion in its 2012 IPO. After the IPO, the stock began trading in the secondary market on the NASDAQ exchange (we’ll cover exchanges in a future chapter). Roughly a year later, Meta completed its first follow-on offering, raising about an additional $1.5 billion. At the same time, a secondary offering occurred when Mark Zuckerberg (CEO of Meta) sold over $2 billion of stock that he personally owned.

Test questions often focus on the difference between a primary and a secondary offering. The key distinction is who receives the proceeds:

• In a primary offering (including IPOs and APOs), the issuer receives the proceeds (for example, Meta sells shares in an IPO and raises $16 billion).
• In a secondary offering, someone other than the issuer receives the proceeds (for example, Mark Zuckerberg sells personally owned shares).

PIPES

A PIPE (Private Investment in Public Equity) offering is a private transaction in which a publicly traded company sells securities at a discount to the current market price. Companies typically use PIPE offerings to raise capital faster and at a lower cost than an IPO, and they’re 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 can’t sell their shares. Because PIPEs are private placements, the investor must be accredited and is often an institution such as a private equity firm or fund.