Secondary offerings are a type of public equity offering. Secondary offerings involve the sale of shares by existing shareholders rather than the issuance of new shares by the company. This can be done for various reasons, such as raising capital for the company or allowing existing shareholders to cash out their investments.
Which of the following best describes a secondary offering?
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A) An initial public offering (IPO) is the first sale of a company's shares to the public. B) A secondary offering involves the sale of existing shares by current shareholders rather than the issuance of new shares by the company. C) The issuance of new shares by the company occurs in an IPO or follow-on offering. D) The sale of a company's shares to a select group of investors is a private placement.
What is the primary purpose of a lock-up period following a secondary offering?
A) A lock-up period prevents existing shareholders from selling their shares immediately after a secondary offering, which can help maintain the stock price. B) The greenshoe option allows underwriters to purchase additional shares at the offering price. C) The lock-up period and greenshoe option can both help stabilize the stock price after a secondary offering. D) A roadshow is conducted before the secondary offering to promote the sale of shares to potential investors.
Which of the following is a potential disadvantage of a secondary offering for existing shareholders?
A) Dilution can occur when new shares are issued in a secondary offering, which can decrease the value of existing shares. B) An increase in the number of outstanding shares can occur in a follow-on offering but not necessarily in a secondary one. C) A decrease in the company's market capitalization is not a direct result of a secondary offering. D) A lock-up period can disadvantage existing shareholders but is not specific to secondary offerings.
In the late 1990s, a large technology company conducted a secondary offering to raise additional capital for expansion. The company's existing shareholders sold some of their shares, and the offering was met with solid demand from investors. The proceeds from the secondary offering allowed the company to invest in new projects and grow its business.
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Example Series 65 Example Practice Question
A well-known social media company conducted a secondary offering several years after its initial public offering. The secondary offering allowed early investors and employees to sell their shares and realize investment gains. The company's stock price remained stable following the secondary offering and continued to grow its user base and revenue.