Subsequent equity sales: Overview, definition, and example
What are subsequent equity sales?
Subsequent equity sales refer to the sale of additional equity securities (such as stocks or shares) by a company after its initial public offering (IPO) or after the issuance of equity securities in an initial sale. These sales typically occur after the company has already raised initial capital and may be used to raise more funds for expansion, debt repayment, or other corporate purposes. Subsequent equity sales can be made to the public, institutional investors, or existing shareholders, depending on the terms of the offering.
Subsequent equity sales may include follow-on offerings, secondary offerings, or private placements. These sales are typically governed by securities regulations and must comply with the necessary reporting and filing requirements set by regulatory authorities, such as the U.S. Securities and Exchange Commission (SEC).
Why are subsequent equity sales important?
Subsequent equity sales are important because they provide companies with the opportunity to raise additional capital after their initial offering. For businesses, these sales can be a way to fund expansion, acquisitions, research and development, or other operational needs. They can also help strengthen the company's balance sheet by raising equity capital, which does not require repayment like debt financing.
For investors, subsequent equity sales can be an opportunity to purchase additional shares in a company. However, these sales can also impact the value of existing shares, as the issuance of more shares can lead to dilution of ownership and a potential decrease in the price per share.
Understanding subsequent equity sales through an example
Imagine a company that conducted an IPO six months ago, raising capital to expand its operations. After experiencing significant growth and needing additional funds to further expand into new markets, the company decides to conduct a subsequent equity sale by offering additional shares to the public. This is a follow-on offering, and the company files a registration statement with the SEC to comply with regulatory requirements. Once the offering is completed, the company raises additional funds, and new shares are issued to investors.
In another example, a company might choose to offer additional equity securities in a private placement to a select group of institutional investors. This form of subsequent equity sale allows the company to raise capital without going through the public offering process, but the securities are not available to the general public.
An example of a subsequent equity sales clause
Here’s how a subsequent equity sale clause might look in a contract:
“The Company agrees that, after the completion of the initial public offering (IPO), it may conduct subsequent equity sales, including but not limited to follow-on offerings or private placements, in accordance with applicable securities laws. The Company will provide prior notice to the Investors of any such subsequent equity sale and will use commercially reasonable efforts to ensure that the terms of such sales are favorable to the Company's existing shareholders.”
Conclusion
Subsequent equity sales are a key mechanism for companies to raise additional capital after their initial offering. These sales can help a company fund growth initiatives, improve its financial position, or meet other corporate needs. While beneficial for businesses looking for additional funding, they can impact existing shareholders by diluting ownership. It is important for both companies and investors to understand the implications of these sales, as they play a significant role in a company's ongoing financing and market valuation.
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.