Incidental underwritten offerings: Overview, definition, and example
What is an incidental underwritten offering?
An incidental underwritten offering refers to a type of securities offering where a company, typically during a larger public offering, allows for the sale of additional securities by shareholders or other parties, with the underwriting process handled by the lead underwriter(s). These offerings are considered "incidental" because they occur in conjunction with a primary offering, usually as part of a larger sale or transaction, but they involve the underwriters facilitating the sale of securities that are not directly issued by the company itself.
In this case, the company might not be issuing new shares but is allowing existing shareholders (such as company executives, major stakeholders, or other entities) to sell their shares to the public. The underwriters of the primary offering will include these incidental shares in their responsibilities, assisting with the sale and ensuring that the process is managed and marketed efficiently.
Why are incidental underwritten offerings important?
Incidental underwritten offerings are important because they provide an opportunity for existing shareholders to sell their holdings in an organized and regulated manner while the company is already going through a public offering. This can help maintain market liquidity and provide an exit opportunity for shareholders who may want to divest or reduce their holdings.
For the company, these offerings can help in the broader public offering process by attracting more attention from investors, as the sale of existing shares can increase the overall size of the offering. The underwriters also benefit because they can collect fees on the additional shares sold, and they may help stabilize the market for the company’s securities. Incidental underwritten offerings can also help maintain the balance of ownership, particularly if insiders or early investors wish to liquidate their positions but are doing so in a way that does not disrupt the primary offering or the company’s stock price.
Understanding incidental underwritten offerings through an example
Imagine a tech company, XYZ Corp, is conducting an initial public offering (IPO) and plans to issue 5 million new shares to raise capital. However, some of the company’s early investors, such as venture capitalists or executives, want to sell a portion of their shares as part of the offering.
In this case, the underwriters handling the IPO also agree to facilitate the sale of 1 million shares from these investors. These 1 million shares are not newly issued by the company; they are existing shares being sold by current shareholders. The sale of these shares is considered an "incidental underwritten offering" because it occurs alongside the IPO, and the underwriters are responsible for managing both the public sale of the company’s new shares and the sale of the existing shares from other shareholders.
Example of an incidental underwritten offering clause
Here’s how an incidental underwritten offering clause might appear in a registration statement or offering document:
“In connection with this Offering, the Selling Shareholders (as defined below) will also be offering up to 1,000,000 shares of common stock held by them. These shares are not being issued by the Company but are being sold by existing shareholders in a secondary offering. The underwriters for the offering will also manage the sale of these shares on the same terms as the Company’s primary offering. The proceeds from the sale of shares by the Selling Shareholders will go directly to the Selling Shareholders, and the Company will not receive any proceeds from the sale of these shares.”
Conclusion
Incidental underwritten offerings are a way for existing shareholders to sell their shares to the public in conjunction with a primary offering, often facilitated by the same underwriters managing the IPO or secondary offering. These offerings help provide liquidity for shareholders and can add to the overall size of the offering, benefiting both the company and the underwriters. While the company may not receive proceeds from the sale of existing shares, these offerings can increase market participation and attract investor interest, making them an important feature in many public offerings. Understanding incidental underwritten offerings is crucial for both companies and investors involved in the issuance of securities and the broader market dynamics.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.