What Every Investor Needs to Know About Secondary Public Offerings

In the fall of 2022, Russian companies again began to actively offer their shares in initial (IPO) and secondary (SPO) offerings. In addition to traditional participants—institutional investors—individuals also have the opportunity to participate. Many brokers provide such services, including through mobile applications. As a rule, a minimum investment amount is set for clients; it is not possible to set your own price, and the application itself may not be satisfied in full.

Photo: Evgeny Pavlenko, Kommersant / buy photo

Photo: Evgeny Pavlenko, Kommersant / buy photo

Issuers go to the people

Next week, the developer Samolet plans to hold an IPO. The organizers of the transaction are VTB Capital and BCS Global Markets, and the co-manager is Otkritie Broker. Last week, the company announced a price corridor for the placement of 5% shares - from 950 to 1.1 thousand rubles. per share, estimating the capitalization before the IPO at 57–66 billion rubles. Trading in shares is expected to begin on the Moscow Exchange on October 29. This is already the second IPO on the Russian market this month. Previously, Sovcomflot conducted an initial public offering of its shares; it became the first IPO in Russia since 2022. In addition, this is the first privatization transaction since the placement of ALROSA in 2013. Along with anchor investors, individuals also took an active part in the placement. According to the Moscow Exchange, the number of transactions during the placement of Sovcomflot shares amounted to 41.2 thousand. In addition, at the beginning of October, an additional issue of Aeroflot shares was placed. The state, anchor investors, and retail investors participated in it. The number of transactions exceeded 6.1 thousand.

What Every Investor Needs to Know About Secondary Public Offerings

Secondary Public Offering (SPO) Calendar.

A secondary public offering (SPO) is the sale of new or private shares by a publicly traded company that has already completed an initial public offering (IPO). A secondary offering occurs when a company's major shareholder sells most or all of his shares. In this scenario, the proceeds of the sale are paid to the shareholder who divests from the company. A secondary offering involves creating new shares and offering them to the public for sale. In this scenario, the proceeds from the sale are transferred to the company for future growth and expansion. What does every investor need to understand about secondary public offerings?

In the last few months, you may have been hearing about companies conducting secondary public offerings. There are many reasons why companies conduct a secondary public offering, and this is an important point for investors to consider. Because at its core, a secondary public offering is an attempt by a company to raise capital, which should always be of interest to investors.

Let's talk about this in more detail with a leading expert from MosPrimeInvest.

Let's look at a few examples. Crispr Therapeutics (NASDAQ: CRSP) completed pricing for its secondary public offering on July 1, 2022. And this is not the first of these proposals the company has undertaken.

For those unfamiliar with the company, Crispr is one of the leading companies in the gene editing therapy space. This is a fascinating field with enormous potential for alleviating pain and suffering. But it doesn't come cheap. The company also does not have any revenue-generating products. Therefore, from time to time the company uses secondary offerings to raise the necessary funds.

Then there's Denny's (NASDAQ: DENN), which also announced pricing for its July 2022 secondary offering. The well-known restaurant chain initiated the SPO for “general corporate purposes.” This could mean many things, but most likely it means the company is either using them to pay off existing debt it incurred as a result of the country's shutdown. Or, more worryingly, he's using the offer to keep the company going while the pandemic continues.

As you can see, the reasons for each proposal can give investors a completely different opinion about owning the stock.

And this is perhaps the key takeaway from secondary public offerings. This is a common tool used by public companies to raise capital. But they can have an effect on the company's shares. And therefore, a secondary public offering should always attract the attention of shareholders.

A secondary public offering (SPO) is an event in which a publicly traded company sells new or private shares after its initial public offering (IPO). SPOs come in one of two types: non-dilutive and dilutive. In a non-dilutive offering, one or more of the company's major shareholders sell all or most of their shareholdings. The proceeds from this sale go to the shareholders who sell their shares. Therefore, no common shares are added. In a diluted offering, new shares of common stock are created and offered for sale to the public.

What is a secondary public offering?

A secondary public offering (SPO) is, as the name suggests, a secondary issue of common stock following a company's initial public offering (IPO). Secondary offerings are sometimes referred to as follow-on offerings or additional public offerings (FPOs).

A secondary public offering can be positive or negative for investors. Investors need to examine two factors: first, what type of secondary public offering is it, and second, what are the reasons for this offering?

What are the two types of secondary public offerings?

As we mentioned earlier, the two types of secondary public offerings are non-dilutive offerings or dilutive offerings. The main difference is what happens to the stock price per share as a result of the SPO.

A non-dilutive event is similar to a private sale of common stock. In this case, a large shareholder or group of large shareholders sells all or part of their shares. The proceeds from this sale go to the shareholders who sell their shares. Thus, there is no addition of common stock (i.e., the company did not increase the number of shares held by investors).

Yes, it is very common for a stock price to fall after a non-dilutive SPO, but that does not make the SPO a dilutive event. Sometimes it may take investors a while to understand the reasons for an SPO.

On the other hand, a dilutive proposal always inevitably affects the price of the underlying shares. To understand why, let's take a closer look at what a dilutive proposal is and why it will directly cause a company's share price to decline.

What are dilutive offerings and why might they be bad?

In a diluted offering, new shares of common stock are created and offered for sale to the public. The company's share price follows the general formula:

Net income – dividends / common shares outstanding.

If the denominator increases significantly, simple math dictates that the overall price per share will decrease. In other words, it has a liquefying effect. The shareholder did not sell any shares, but the value of his holdings (per share) decreased.

How do secondary public offerings differ from initial public offerings?

An initial public offering (IPO) is an event that occurs when a company begins trading as a public company on a US exchange. Since the company conducting the IPO has no trading history, the process takes a long time. The three main stages of the IPO process are the underwriting stage, the application stage and the registration stage. If handled correctly, an IPO should take six to nine months to complete.

In contrast, an SPO can be completed much more quickly, usually in just a few days. With an SPO, spot or overnight offers are announced at the end of the trading session and distributed to investors in just a few hours. The typical SPO price is below the stock's last closing price. This means that, unlike an IPO, investors have a pretty good idea of ​​what demand there will be for the offering since the price is generally considered attractive.

What are the benefits of a secondary public offering?

If an SPO is offered for growth financing, it can offer shareholders an incredible opportunity for capital growth. The phrase “short-term pain, but long-term gain” comes to mind. While investors may initially see their investment decline (if the SPO is a dilutive event) overall, the stock will have a chance to recoup any losses and rise.

Keep in mind that this is not to promote the idea of ​​“catching a falling knife.” There are times when stocks fall for good reason. And when that happens, as discussed below, it's usually best to stay away. However, when a company's stock rises, an SPO can generate additional growth, which is a win-win situation.

What are the risks of a secondary public offering?

Overall, secondary public offerings can be beneficial for shareholders. But there are two main risks. One is based on company fundamentals and the other is based on technical price movement. Luckily, both are easy to understand and avoid.

Fundamental risk comes from why the money is being raised. Many companies initiate SPOs to support expansion projects, such as purchasing another company or building infrastructure that will ultimately allow them to increase market share or become a significant player in a new market. In this case, a secondary public offering could give investors a chance to get ground level exposure to growing stocks.

On the other hand, an SPO may be required to resolve liquidity problems. In this case, buying shares can be incredibly risky since there is no guarantee that the company's shares will bounce back.

From a technical perspective, SPOs are generally not very attractive to day traders and other active traders. This is because while a secondary offering may give investors the opportunity to buy shares at a discount to the market price, there is a possibility that the shares could open below the SPO price the next day (as mentioned above, this can happen even if the intention is the event was not dilutive).

How can investors find out about an upcoming secondary public offering?

Obviously, information is power. Therefore, knowing when a secondary listing is planned will be a huge advantage for both buyers and sellers. But are there ways to find out when a company plans to hold an SPO?

Well, like market timing itself, there is no perfect way to know. However, there are typical cases where an SPO is more likely. First, an SPO can occur when the lock-up period ends after the IPO. Keep in mind that there is usually a three to four week period following an IPO when company insiders and institutional investors are prohibited from selling their shares. However, after this period, it is not uncommon for these insiders to sell shares without dilution.

Another timing indicator can occur when a company that has historically underperformed the market sees its shares rise due to high trading volume. A company may make a dilutive offer to take advantage of capital raising provisions. On the other hand, major shareholders may take the opportunity to reduce their investment (sometimes in anticipation of a fall in price).

The third indicator is the company's own history. The reality is that many companies have more than one SPO. Knowing whether a company has a history of conducting SPOs can help you determine when another one will occur.

A final indicator of timing may be when a company is in a period of financial crisis. The novel coronavirus has created a need for many companies to find ways to quickly raise capital. If a company is finding it difficult to borrow money from the debt markets, a secondary offering may be their only option.

An individual investor should always understand when and why a company is attempting an SPO.

How can investors access an SPO?

The short answer is to know when it comes. This is because secondary offers happen very quickly. It can be difficult for insurers to find buyers. It can be difficult for retail investors to even hear about them. MarketBeat.com offers a secondary public offering calendar that shows when companies plan to launch an SPO.

Summary of secondary public offerings.

Secondary public offerings are quite common. When they complete their growth plans, they give major shareholders the opportunity to cash out their investments by allowing individual shareholders to buy up shares of the growing company. Even if an SPO is a dilutive event, it can be a smart investment for astute investors who are confident that the company's fundamentals are strong.

This does not mean that secondary offerings are risk-free. They can be risky simply because a company may initiate an SPO because they need to raise money quickly due to low liquidity. In this sense, SPO may be their only alternative because they cannot raise debt through standard retail outlets. In this case, an SPO may give the stock a short-term boost, but will result in negative consequences for shareholders if the company does not solve its underlying problems.

Entry by application

Traditionally, IPOs and SPOs are conducted among large, primarily institutional, investors. However, increasingly, including on the Russian market, individuals are also given the opportunity to participate in placements. According to the head of the department of the Internet broker BCS World of Investments, Igor Pimonov, an individual can apply to participate in the placement of shares through any broker that provides this opportunity to its clients. Next, this broker, if he is not the organizer of the placement, goes to the organizer and submits a general application. “There are both exchange and over-the-counter placements. As for the IPOs of Sovcomflot and Samolet, these are over-the-counter placements and do not go through the Moscow Exchange. There are also completely exchange orders, when a broker’s client can place an order for placement directly on the exchange, and the placement transaction itself will also take place on the exchange in a separate trading mode,” notes Igor Pimonov.

You can submit an application in any available way by phone through a trader, on paper at a broker or bank branch, through a web account or through a mobile application.

“We accept applications only on application collection days set by the organizers. But we publish information about upcoming placements in the mobile application in advance; the client can click the “track” function and will receive a notification that the collection of applications has begun,” notes Vladimir Potapov, Chief Executive Officer of VTB Capital Investments.

What is SPO shares in simple words

SPO (from the English “Secondary Public Offering” - Secondary Public Offering) is the sale of part of one’s share of shares to existing large shareholders for a wide range of investors.

Sales goals may vary. For example, increase the Free Float coefficient to increase the weight in the MSCI Russia index.

Let us remember that a share is an equity security that gives the right to co-own a part of the company. The number of holdings determines the investor's share of the business. The holders are called shareholders.

Large investors do not trade their stakes on the stock exchange. Their part of the shares is simply in the depository. Most often they are called majority shareholders. Small holders are called minority shareholders (their stakes are less than 0.01% of the total issue for each investor).

The free float coefficient shows the number of shares in free float out of their total number. The more free float, the better for the company’s quotes. They become more liquid.

Most new investors are familiar with IPO (initial public offering). IPIO is the initial entry of shares to the stock exchange through funds and banks. In the case of an SPO, there is simply a resale of an already outstanding package of securities.

When we talk about SPO, we mean the sale of a non-public part of shares. That is, they were not listed on the stock market because they were owned by a strategic investor (who owned them for long-term purposes).

Who carries out the SPO procedure:

• The company itself, which held a large block of securities;
• State;
• Large shareholders (meaning dollar millionaires and billionaires);

For example, the state could own 55% of the company. In order not to lose a controlling stake, it can sell 5% and still remain the main shareholder. However, most often the packages are sold by other large companies based on their own personal interests. For example, you need money for other investments and so on.

Crossing thresholds

However, you cannot participate in placements on the Russian market with any amount of funds. Thus, in BCS, the minimum amount for participation in Russian IPOs is 100 thousand rubles; in Tinkoff, in the case of placements of Sovcomflot and Aeroflot, the minimum threshold was set at 10 thousand rubles. Participation in “VTB My Investments” is available from one piece of paper.

At the same time, the retail investor’s ability to influence the price is very limited.

“The client indicates the required amount for which he would like to participate in the IPO, and purchases securities at the offering price,” Tinkoff representatives indicate. A similar mechanism operates with other brokers. If the placement price is lower or higher than the initial price, the transaction will take place at the actual placement price. Until the IPO takes place, funds are usually blocked for the application. On the settlement date, funds are debited from the account.

However, if an investor has lost interest in the placement of shares or is no longer satisfied with the expected placement price, he can withdraw the application. For example, in the case of BCS, you can cancel the order before the end of the period for submitting instructions for participation (until 15:00 Moscow time the day before placement). “If a broker has placed a cumulative order, then after that an individual cannot cancel participation,” notes Igor Pimonov. According to Vladimir Potapov, at VTB you can refuse to participate in the placement while the order book is open.

Why carry out IPO/SPO in Russia

On foreign exchanges, IPOs are usually carried out by companies that need to develop abroad; for some reason, the presence of foreign investors is important, or their management is confident that they will not be able to attract enough money in Russia.
If the company believes that it can receive a sufficient amount of investment at home and does not have any special interests abroad, then the process of preparing an IPO/SPO at home may be completely justified. One of the main reasons is the cost of the entire process.

A company can prepare an IPO on its own, but usually investment companies (underwriters) are hired to prepare documents, coordinate them with regulatory authorities and work out technical issues (cost, volume of placement). It is clear that in Russia all the costs associated with conducting an IPO - underwriter services, various government and exchange fees and commissions - ultimately turn out to be lower. The entire preparation process usually takes from several months to a year.

The harsh word "allocation"

After the order book is closed, the issuer and the placement organizers will distribute securities among investors who submitted applications. “Depending on the total demand, they can satisfy 100%, or partially, or 0%,” notes Vladimir Potapov. “The time of submission of the order or the volume of the application does not in any way affect the final distribution, since our company has a single percentage. If BCS received an allocation of 20%, then all clients will receive 20%,” notes Igor Pimonov. According to him, delivery of papers usually occurs on the second day, that is, T+2 mode. “If there are no additional conditions for the placement, then clients will be able to trade these securities immediately after the placement transaction is concluded, on the very first day of trading,” notes Mr. Pimonov.

“Repeat” and “secondary” placement. What is the difference?

The concepts are often mistaken for synonyms, but in vain. Repeated placement or FP – Follow-on Public Offering – means an additional issue of new company securities or additional capitalization.

This is often followed by a depreciation of the shares already held, which negatively affects the holders. FPOs are carried out by unscrupulous issuers.

In the case of a secondary placement, there is no additional issue: it is not the number of shares that changes, but their owners. Consequently, the share of each shareholder individually does not suffer from this.

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