What is an offering?
An offer is the issue or sale of a security by a company. It is often used in reference to an initial public offering (IPO) when the shares of a company are made available to the public for purchase, but it can also be used in the context of a bond issue.
An offer is also called a securities offer, investment round or financing round. An offer of securities, whether an initial public offering or otherwise, represents a unique investment or financing round. Unlike other tricks (such as seed tricks or angel tricks), an offer involves the sale of stocks, bonds, or other securities to investors to generate capital.
Key points to remember
- An offer refers to a company that issues or sells a security.
- It is most often known as an IPO.
- IPOs can be risky as it is difficult to protect the stock’s performance on its first trading day.
Operation of an offer
Usually, a company will offer stocks or bonds to the public for the purpose of raising capital to invest in expansion or growth. There are cases where companies offer stocks or bonds due to liquidity problems (i.e. not enough cash to pay the bills), but investors should be wary of any such offer.
When a company launches the IPO process, a very specific set of events occurs. First, an external IPO team is formed, consisting of an underwriter, lawyers, chartered accountants (CPA) and experts from the Securities and Exchange Commission (SEC). Next, information about the company is compiled, including financial performance and expected future transactions. This is part of the company’s prospectus, which is being distributed for review.
Sometimes companies will issue what’s called a shelf prospectus, detailing the terms of several types of securities it plans to offer in the coming years. The financial statements are then subjected to an official audit, and the company files its prospectus with the SEC and sets a date for the offer.
Why IPOs are risky
IPOs, as well as any other type of offer of stocks or bonds, can be a risky investment. For the individual investor, it is difficult to predict what the stock will do on the day of its initial trading, and in the near future there is often little historical data to use to analyze the company. In addition, most IPOs are aimed at companies going through a period of transient growth, which means that they are subject to additional uncertainty regarding their future values.
The IPO subscribers work in close collaboration with the issuing body to guarantee the smooth running of an offer. Their goal is to ensure that all regulatory requirements are met, and they are also responsible for contacting a large network of investment organizations to research the offer and assess the value of setting the price. The amount of interest received helps an underwriter set the offer price. The underwriter also guarantees that a specific number of shares will be sold at this initial price and will purchase any surplus.
A secondary market offer is a large block of securities offered for public sale that have previously been issued to the public. The blocks offered may have been held by large investors or institutions, and the proceeds of the sale accrue to these holders, and not to the issuing company. Also called secondary distribution, these types of offers are very different from the initial public offers and do not require roughly the same amount of background work.
Non-initial public offers and initial public offers
Sometimes an established company will offer shares to the public, but such an offer will not be the first offer of securities for sale by that company. Such an offer is known as a non-initial public offer or a seasoned share offer.