Secondary Offerings and How They Move Stock Prices

When a company goes public, it sells shares for the first time in an IPO. But that’s not the end of the story. After the IPO, companies and early investors often come back to the market with something called a secondary offering. It sounds simple - just selling more shares - but what happens next can make or break a stock’s price. Understanding how these offerings work, and why they move prices, is critical for any investor holding shares in a public company.

What Exactly Is a Secondary Offering?

A secondary offering is when shares are sold after a company’s IPO. But not all secondary offerings are the same. There are two main types, and they have opposite effects on your ownership and the company’s finances.

The first type is a non-dilutive secondary offering. This happens when existing shareholders - like venture capitalists, founders, or early employees - sell their shares to the public. The company doesn’t get any money. The cash goes straight to the sellers. Think of it like someone selling their used car: the car’s value doesn’t change just because it changed hands.

The second type is a dilutive secondary offering, also called a follow-on offering. Here, the company itself issues new shares. More shares mean more total ownership out there. That’s dilution. Your 1% stake might drop to 0.95% overnight. The company gets the cash, though - usually to pay down debt, buy another business, or fund new projects.

These aren’t just academic distinctions. They determine whether your shares become more or less valuable after the announcement.

How Do Secondary Offerings Affect Stock Prices?

Stock prices don’t react to the idea of a secondary offering - they react to what kind it is and how it’s handled.

Dilutive offerings almost always cause a price drop. Why? Because earnings per share (EPS) gets split across more shares. If a company made $100 million in profit and had 100 million shares, EPS was $1.00. If it issues 20 million new shares, EPS drops to $0.83 - even if profits stay the same. Investors notice this. Data from Goldman Sachs shows dilutive offerings cause an average 4.2% price drop on the day of announcement.

Non-dilutive offerings are trickier. The company doesn’t get new money, but the stock still often falls - just less. On average, these cause a 1.8% dip. Why? Because the market sees more shares suddenly available. More supply means lower prices, unless demand is strong enough to absorb it.

Timing matters too. About 68% of secondary offerings happen within 180 days after an IPO lock-up expires. That’s when early investors are finally allowed to sell. If a bunch of them dump shares all at once, the price can tumble. But if the selling is spread out, or if the market expects it, the drop can be mild.

Why Do Companies Do This?

Companies use dilutive offerings to raise capital without taking on debt. Tesla raised $5 billion in 2020 through a follow-on offering to build Gigafactories. Amazon did the same in 1998 to fund international growth. In both cases, the money went into high-return projects. The stock price dropped at first - but then surged as the businesses grew.

Non-dilutive offerings serve a different purpose: liquidity. Early investors like Sequoia Capital didn’t want to hold Coinbase forever. They sold chunks of their stake over time through non-dilutive offerings. The company didn’t get cash, but the investors did. And since no new shares were created, the company’s financials stayed clean.

Sometimes, it’s a mix. A company might sell shares to raise cash (dilutive) while insiders simultaneously sell some of their own (non-dilutive). That’s when confusion sets in. Investors have to ask: Is the company raising money to grow - or are insiders bailing?

What Investors Should Watch For

Not all secondary offerings are bad. Some are outright bullish. Here’s how to tell the difference.

First, check the discount. Dilutive offerings are usually priced 3-7% below the current market price to attract buyers. If the discount is 10% or more, that’s a red flag. It suggests the company knows the stock is overvalued - or demand is weak.

Second, look at who’s selling. If it’s a founder or CEO selling shares, that’s a signal. If it’s a hedge fund that’s held the stock for five years, it’s probably just taking profits. Check SEC Form 4 filings to see who’s selling and how much.

Third, watch the volume. If the offering size is more than 200% of the stock’s average daily trading volume, the market may struggle to absorb it. That’s when you see long-lasting price drops. If the offering is small relative to trading volume - say, 50% or less - the impact is often minimal.

Fourth, read the purpose. If the company says it’s using the cash to pay off debt or buy a competitor, that’s a good sign. If the filing says “general corporate purposes,” that’s vague. It could mean anything - including covering losses.

Real-World Examples That Tell the Story

In April 2023, Rivian raised $1.6 billion through a dilutive offering. The stock dropped just 1.2% the next day. Why? Because investors knew the money was going toward new vehicle launches. The market trusted the plan.

Contrast that with WeWork’s 2021 offering. The company had already lost billions. Investors didn’t believe in the business model. The offering was priced at a 17% discount. The stock collapsed.

On the non-dilutive side, Pinterest’s 2022 offering sparked outrage on Reddit. Users called it a “sell-off by insiders.” The stock fell 18% in a week. But Fortinet’s 2023 offering was met with cheers. The company had strong earnings, and the offering was small. The stock kept rising. The market absorbed the shares quickly.

How to React When a Secondary Offering Is Announced

Don’t panic. Don’t rush to sell. Do this instead:

• Wait 3-5 days after the announcement. Most of the price drop happens in the first 48 hours.
• Check if the offering is dilutive or non-dilutive. Use the company’s SEC filing (Form 424B5).
• Recalculate EPS if it’s dilutive. Divide current earnings by the new total number of shares.
• Compare the offering size to average daily volume. If it’s under 150%, it’s manageable.
• Look at the company’s fundamentals. Strong revenue growth? Healthy balance sheet? The stock will likely recover.

Historical data shows 65% of secondary offerings recover their initial price drop within 15 trading days - if the company’s business is solid.

The Bigger Picture: Trends and Risks

The number of secondary offerings has grown every year since 2010. In 2022, U.S. companies completed 1,247 follow-on offerings totaling $387.6 billion. Tech companies led the pack, making up 37% of all offerings.

A new trend is “at-the-market” (ATM) offerings. Instead of one big sale, companies sell small amounts daily. It’s less disruptive. But it can feel like a slow drip of dilution - which frustrates investors. Moderna, for example, did four small offerings in 18 months. Each time, shareholders lost a few more percentage points of ownership.

Regulators are watching. In August 2023, the SEC proposed new rules requiring clearer labeling of dilutive vs. non-dilutive offerings. That’s good news for investors. Transparency reduces confusion.

The biggest risk? Market saturation. In the first half of 2023 alone, 12 electric vehicle companies raised $8.7 billion through secondary offerings. Investors are getting tired of it. If you’re holding EV stocks, you need to be extra careful about which offerings are growth-driven - and which are cash grabs.

Final Takeaway

A secondary offering isn’t inherently good or bad. It’s a tool. And like any tool, its impact depends on how it’s used.

If a company is raising money to build something valuable - factories, software, global reach - then a dilutive offering might be a smart move. The short-term pain can lead to long-term gains.

If insiders are cashing out while the company’s growth slows, that’s a warning sign. The stock may keep falling.

The key is to look past the headline. Don’t just see “company raises $X million.” Ask: Who’s getting the money? What’s it for? And will this make the company stronger - or just richer for a few people?

The market rewards clarity. It punishes ambiguity. Do your homework, and you’ll know when a secondary offering is a buying opportunity - or a signal to get out.