What is a Primary Offering?

Malcolm Tatum

Another name for an initial public offering or IPO, a primary offering is the first round of a private company going public and issuing shares of stock that may be purchased by anyone in the public sector. Companies often take this step as a means of raising the funds needed to carry out expansion strategies. Both private companies that have been around for some time and brand new companies may choose to go public and engage in this type of offering situation.

Man climbing a rope
Man climbing a rope

In order to issue a primary offering, the private company must take the steps necessary to convert from its private status to that of a public company. While specific procedures vary from country to country, this normally means that the business must file documents with a national regulatory agency that identify the intention to go public, and outline how that will be accomplished. Assuming that the business complies with all applicable regulations, the government agency will provide guidelines for registering the company as a publicly traded entity and how to go about preparing for the primary offering of shares of stock. In the United States, private companies that wish to go public and engage in an initial public offering must register with the Securities and Exchange Commission (SEC), and comply with all regulations put in place by that agency.

Many businesses will call on the services of investment banks in order to structure and launch a primary offering. This is often a wise move, since the banks can help expedite the introduction of the stock offering to investors who might be interested in acquiring the newly released shares. The bank will often follow a strategy of announcing the impending offering to their clientele, thus generating interest in the investment community. At the same time, the bank will also begin introducing the new offering to the markets where it will ultimately trade, which in turn serves to further attract the attention of potential investors.

One of the benefits of properly structuring and executing a primary offering is that a great deal of money is raised in a short period of time. If the idea is to use those funds for expansion efforts, this means that the company can move forward with that expansion sooner rather than later. Assuming that the expansion effort is successful, that means the investors who participate in the primary offering will often realize a return within a very short period of time, often in the form of an increased price for each share of stock they own.

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