What it means
Companies raise money in two basic ways, borrowing it or selling ownership, and an offering is the formal event through which either happens in the capital markets. An equity offering sells shares and dilutes existing owners, while a debt offering sells bonds and creates an obligation to pay interest and repay principal.
The choice shapes the balance sheet for years afterwards. Offerings are usually described by who is selling and to whom.
In a primary offering the company issues new shares and keeps the cash, whereas in a secondary offering existing shareholders sell their stock, so the company itself raises nothing. Many listings mix the two, which is why the headline size of a float can differ sharply from the money the business actually receives.
The mechanics are handled by investment banks acting as underwriters. They help set the price, market the deal to institutions during a roadshow, and often commit to buying any securities left unsold, charging an underwriting discount for the service.
The gap between gross proceeds and net proceeds is where those fees, legal costs and listing expenses sit. Regulation drives much of the cost.
A public offering requires a prospectus or registration statement with audited accounts and detailed risk factors, while a private placement to professional investors relies on lighter documents and comes with restrictions on resale. Smaller companies often prefer the private route precisely because the disclosure burden is lower.
For existing shareholders the key questions are dilution and use of proceeds. Issuing new shares reduces everyone's percentage stake, which is only worth accepting if the money funds something that grows earnings faster than the share count.
Investors read the use-of-proceeds section closely for exactly that reason.
In practice
Real-world examples.
Example
A drinks group floats on an exchange by selling 12,000,000 shares at $18.00, raising $216,000,000 gross before fees. Two thirds of the shares are new and one third are sold by the founding family, so only part of the money reaches the company.
Example
A manufacturer issues $250,000,000 of seven year notes carrying a 6.5% coupon, committing it to $16,250,000 of interest a year. No shares are created, so existing shareholders keep their full percentage stake and simply take on more financial leverage.
Example
A clinical stage biotech places 2,500,000 shares at $8.00 with four specialist institutions, raising $20,000,000 in a fortnight. The private route avoids a full prospectus, but the new shares cannot be freely resold for a set period.
Formula
Calculation
Gross proceeds = shares offered x offer price
Net proceeds = gross proceeds - underwriting discount - other offering expenses
A software company sells 4,000,000 new shares at $25.00 each.
Gross proceeds = 4,000,000 x $25.00 = $100,000,000.
Underwriting discount at 6% = $100,000,000 x 0.06 = $6,000,000.
Legal, accounting and listing costs = $2,000,000.
Net proceeds = $100,000,000 - $6,000,000 - $2,000,000 = $92,000,000.
Dilution follows from the new share count. There were 16,000,000 shares in issue beforehand, so the total becomes 16,000,000 + 4,000,000 = 20,000,000. An investor who owned 1,600,000 shares, or 10% of the company, now owns 1,600,000 / 20,000,000 = 8%, and has given up two percentage points of ownership in exchange for the company holding $92,000,000 of new cash.Case study
Seen in the real world.
The following is an illustrative example using a fictional business. Corrimal Robotics, an invented maker of warehouse automation, had 20,000,000 shares outstanding and needed capital to open a second factory. It ran a primary offering of 5,000,000 new shares at $12.00, raising $60,000,000 gross.
Underwriting fees of 7% took $4,200,000 and legal, audit and exchange costs took a further $1,800,000, leaving net proceeds of $54,000,000. The share count rose to 25,000,000, so the founders' block of 12,000,000 shares fell from 60% of the company to 12,000,000 / 25,000,000, or 48%.
The founders accepted that dilution because the new factory was forecast to lift operating profit by more than the 25% increase in share count. The board's discipline was to report, every quarter, whether the money raised was actually delivering that return, so shareholders could judge whether the dilution had been worth it.
Watch out
Common mistakes.
- Assuming every offering raises money for the company, when in a pure secondary offering the cash goes to the selling shareholders instead.
- Quoting gross proceeds as though the company received them, when fees and expenses can absorb 5% to 10% of a smaller deal.
- Ignoring the lock-up period, so the share price is judged before a large block of insider stock becomes free to sell.
Questions
People also ask.
What is the difference between an offering and a listing?
An offering is the sale of securities to investors, while a listing is the admission of those securities to trading on an exchange, and a company can do one without the other.
Why do companies choose private placements?
They are faster and cheaper, require less disclosure and avoid the scrutiny of public markets, at the cost of a narrower investor base and less liquid stock.
Does an offering always dilute existing shareholders?
Only if new shares are issued, since a debt offering or a sale of existing shares by a shareholder leaves the total share count unchanged.
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