Secondary Public Offering (SPO)

Introduction: What is SPO

A Secondary Public Offering (SPO) is a company's offering of shares after its Initial Public Offering (IPO). In other words, an established public company issues new shares or sells additional shareholder packages to a broad range of investors. The principles of trading remain public: transactions are conducted on an organized market, and the offering process is regulated by law. In international practice, this operation is often referred to as a Secondary Public Offering or follow-on offering; in Russia, it is occasionally called “additional (authorized) offering” of shares. The main difference between an SPO and an IPO is that an IPO is the first introduction of a company to the stock exchange, while an SPO occurs only after the securities are already in circulation. Depending on the situation, the second offering can involve both the issuance of new shares (additional issuance) to raise capital and the public sale of securities by existing shareholders.

An SPO allows a company to expand its shareholder base and attract funding, while investors gain access to purchase shares at a fixed price. In Russia, secondary offerings have been used relatively recently, since the development of the stock market in the 2000s. While the approaches to organizing such offerings are similar to international ones, they also carry specific features related to Russian legislation and market structure.

History and Development of Secondary Offerings

Secondary offerings have developed as a logical continuation of capital market tools. In Western practice, the subsequent offering of securities has been used for a long time: many companies continue to grow after their IPOs and require additional capital. For instance, in large economies such as the US and Europe, public companies regularly conduct follow-on offerings to finance business expansion. During economic upturns, the volume of SPOs increases, while it decreases during crises.

In Russia, secondary offerings became possible alongside the development of the securities market in the post-Soviet era. Since the early 1990s, a regulatory framework for share offerings has been established. A crucial element was the Federal Law "On the Securities Market" from 2002, which defined the rules for conducting public offerings of shares, including additional offerings. The Moscow Exchange and other trading venues gradually established regulations for conducting SPOs.

The first active application of SPOs in the Russian market occurred in the mid to late 2000s. During this period, the transparency of companies improved, international financial reporting standards were adopted, and investor interest in public companies grew. However, after the global financial crisis of 2008-2009, activity in the IPO and SPO markets declined. In the following years, moderate growth in the number of secondary offerings has been observed with the stabilization of the economy. Some stimulus also came from the increase in local and foreign investments after the ruble devaluation in 2014, as companies began seeking capital and the market adapted to new conditions.

In recent years, the Russian SPO market still lags behind its international counterparts in terms of volume. This is explained by the lower share of public companies in the Russian economy, with many firms preferring private funding or loans. Nevertheless, due to integration with global markets and the increasing demand for capital, SPOs are becoming more widespread. International experience suggests that as financial markets develop, the share of additional offerings will grow. For comparison, in major economies, every third IPO company eventually conducts at least one follow-on offering to support growth. In Russia, such data is less accessible, but there is a trend towards an increase in SPO transactions, especially among large issuers.

Stages of SPO and Conducting Mechanism

Organizing a secondary offering of shares involves several key stages. Their sequence and scale can vary, but the general mechanism typically follows this outline:

1. Decision-making. The initiators of the offering are usually the company's board of directors or a general meeting of shareholders. An official decision is needed regarding the issuance of additional shares (or the sale of shares by existing owners) and the parameters of the offering - the volume of issuance and the indicative price. In the case of additional issuance, approval from the general meeting of shareholders is often required (especially if the issuance increases the charter capital).

2. Document preparation. The company, along with legal advisors and investment bankers, prepares the prospectus (or another document for investors). The prospectus details the company's business, the goals for raising funds, financial performance, and risks. Appendices are also prepared: audit reports, financial statements for several years, information on current shareholders, and plans for market entry.

3. Prospectus registration. The offering prospectus is registered with a regulatory body (in Russia, with the Central Bank, which acts as the securities market regulator). By law, shares cannot be offered to an unlimited number of persons without prospectus registration. This stage can take several weeks due to document examination. The regulator checks the completeness and accuracy of the disclosed information.

4. Selection of underwriters and advisors. As in IPOs, the company may hire underwriters - investment banks that help organize the offering. Underwriters may guarantee the repurchase of part or all of the offering at a pre-agreed price (guaranteed subscription). In Russian practice, the participation of underwriters is not mandatory but is often present in large transactions. They analyze demand, advise on price and volume, and coordinate interaction with investors.

5. Marketing and presentations (road-show). After registering the prospectus, the company, along with the organizers, conducts a "road-show" - meetings and presentations for potential investors (both institutional and retail through major brokers). This is crucial for generating demand and assessing market interest. Companies discuss their strategies and answer investors’ questions. In international practice, such presentations are mandatory; in Russia, they may be more limited, although large offerings often include a series of events for analysts and major clients.

6. Book-building. One common method of selling shares is so-called book-building. Investors submit bids to purchase a certain number of shares at various price levels. Based on these bids, the organizers assess demand and determine the final price of the offering. In Russia, the "open subscription" method is also applicable: the company announces the offering price in advance, and investors submit bids to purchase at that price during a specified time. The choice of method depends on the size of the deal and the specifics of regulatory rules.

7. Price determination. Based on demand analysis, underwriters, together with the company, set the final offering price. It is often set slightly below the last market price of the shares to ensure demand (especially if the market is volatile). However, other approaches are also possible: the price may match the current stock value or be determined by the market equilibrium of supply and demand. If there are many bids (over-subscription), some allocation of shares between bidders will inevitably be required.

8. Share distribution. On the designated date, shares are distributed among investors, and funds are credited to the company’s account (or to the shareholders selling shares). Depending on the mechanism, this can occur on a fixed subscription day or during a trading period on the exchange. In Russia, a special escrow account is used for some procedures: investors deposit money into it before the official trading starts, and then shares are allocated based on the outcome of the offering.

9. Trading commencement and post-distribution. After distribution, the issuance of new shares to the register is organized, and they begin trading on the exchange. From this point, the papers start trading freely. For large SPOs, price stabilization mechanisms may be introduced. In international transactions, the "green shoe" (an underwriter's option to sell more shares) is common, but in Russia, such an instrument is rarely used. Nevertheless, underwriters may temporarily support the price in the market by purchasing shares if the price starts to decline sharply. Additionally, the prospectus usually outlines commitments from key shareholders to refrain from selling shares for a certain period (lock-up) to avoid creating excess supply in a short time.

Thus, the secondary offering process combines legal and market steps: from the company decision and document registration to active market interactions with investors and the actual trading of shares. Depending on the scale and complexity of the deal, an SPO can take anywhere from one to several months.

Why Companies Conduct SPOs

Companies initiate secondary offerings for various reasons, primarily seeking to strengthen their financial position and support business growth. The main motivations for an SPO include:

• Capital attraction. The most obvious reason is to raise additional funds. The money from the issuance goes into the company's capital and can be directed toward production expansion, launching new projects, research and development, or technological advancements. This allows for faster implementation of strategic plans without increasing debt burdens.

• Debt repayment and capital structure optimization. Instead of taking on new loans or increasing debt load, a company can sell part of its shares. The funds raised will be used to cover debt or refinance loans. This improves financial ratios (for example, reduces the debt-to-equity ratio) and lowers default risks.

• Expanding the shareholder base and liquidity. Issuing new shares or selling stakes attracts new investors, enhancing the liquidity of the shares on the exchange (increased daily trading volume). The more market participants own shares of the company, the easier it is to buy and sell these papers. Increased liquidity often positively impacts the market valuation of the company.

• Issuing shares for loyalty and incentive programs. Proceeds from the SPO can be used to develop long-term incentive programs for executives or employees. This is part of a motivational strategy where new shares are reserved for rewards, bonuses, or options, helping to retain key staff.

• Exit for initial investors. In cases where the company has been funded by venture capital funds or large private investors, they may wish to sell part of their shares when valuations are favorable. An SPO provides them with a public channel to liquidate their stake. Some of the funds may go to the selling shareholders, and part may go to the company (if a new issuance is made).

• Increasing visibility and image. Conducting a large offering can draw attention to the company from the markets and the media. It demonstrates management’s confidence in the business's prospects. In some instances, companies also strive for their shares to be held by major institutional investors (investment funds, banks) and to be widely distributed across retail investor accounts.

Despite these advantages, SPOs also have downsides. The issuance of new shares automatically dilutes the ownership of existing shareholders, reducing their stake. Additionally, the market may perceive an SPO ambiguously. If the offering is conducted at too low a price, some investors may think that management is signaling problems in the business. Conversely, too high an offering price may lead to weak demand and inefficiency in the process. Therefore, companies weigh the pros and cons before proceeding with an SPO: on one hand, there is a need for capital, while on the other, there are risks that may affect shareholder value.

Benefits and Risks for Investors

When considering participation in a secondary offering, an investor gains several advantages, though accompanied by certain risks. Below are the main ones:

• Advantages:

  • Fixed purchase price. The investor knows the offering price in advance or after book-building before trading begins. If it is below the current market price, there is a chance to realize a profit when quotes rise after trading starts.

  • Access to large issuers. SPOs provide the opportunity to buy shares in large companies, which can be difficult to enter through the spot market alone (especially if demand exceeds supply). Oftentimes, priority in allocations is given to institutional investors with more favorable terms.

  • Partial control over issuance policy. Participants can see the purpose of the offering and assess where the raised funds will go. This makes the decision to purchase more informed.

  • Opportunity to build a position. Investors have time to think through the deal before trading commences. If a strategy is executed effectively, they can realize profits quickly in the first days of trading.

• Risks:

  • Ownership dilution. Issuing a large volume of shares can lead to a reduction in the total value of each shareholder's stake. After an SPO, there are more shares in the company, so some future profits are distributed among a larger number of holders.

  • Unsuccessful offering and price decline. If the SPO is conducted at a price exceeding the current value or without sufficient demand, quotes may drop after trading starts. Over-saturation with shares often puts pressure on the market.

  • Lack of information. Despite the disclosed prospectus, not all business nuances may be considered. A newcomer to the market or a retail investor may not have the complete picture and make decisions based on insufficient information.

  • Market signals. The sale of large blocks of shares by major owners may raise doubts; investors might think that insiders are using the offering to exit a poor investment.

  • Short-term liquidity constraints. Until the new issuance is distributed and begins trading freely, investors receive shares only through brokers after the offering, rather than immediately. This could involve a brief waiting period before the shares are reflected in the account.

Therefore, the benefits of participating in an SPO lie in new investment opportunities and a relatively formal purchasing procedure, but it is crucial for investors to carefully analyze potential drawbacks. High returns may be offset by additional risks associated with both the financial instrument itself and the company's situation.

How to Evaluate Participation in SPO

Before participating in an SPO, investors should conduct a thorough analysis of the upcoming offering. Recommended steps and evaluation factors include:

• Assessing the rationale for the offering. First and foremost, it is essential to understand what the company plans to spend the raised funds on. If the SPO is directed toward promising projects or business expansion, this is a positive signal. Conversely, if the money is needed to cover losses or pay dividends, risks are higher.

• Financial condition of the issuer. Analyze key financial indicators of the company – revenue, profit, profitability, debt load. Strong past performance does not guarantee future project success, but it does help assess the business's stability. Pay attention to trends: are sales and profits growing or declining, are there losses?

• Price comparison with current quotes. Compare the offering price with the initial stock quotes. Often the SPO price is set at a discount to the market. If the offering is at a price above the average market price, the investor risks incurring a loss immediately after trading starts. The optimal situation is an offering price below or approximately equal to the market price (taking commissions and temporary fluctuations into account).

• Share issuance proportion. Determine what percentage of the charter capital the offered shares will occupy. If this is a significant percentage (e.g., more than 10-20% of the already existing shares), the dilution effect will be substantial. The larger the share, the more carefully potential stock price drops should be regarded.

• Subscription terms. Understand the mechanism of the offering. Will the underwriter guarantee the purchase of unsold papers (guaranteed subscription), or will only the issuer bear the risks (without guarantees)? Standards can vary: sometimes there is no underwriting at all. Clarify whether the possibility of early cancellation of the offering or price changes due to low demand is provided. The more transparent and secure the conditions, the better for the investor.

• Level of demand and priority. Find out who will receive the shares first. In Russia, a portion of shares is often reserved for large institutional investors, with retail investors receiving the remainder. If demand is very high, the investor (especially a smaller one) may only receive part of the requested quantity. Assess the likelihood of "missing out" on shares and its impact on the overall strategy.

• Market context. Evaluate the current situation in the stock market and the relevant sector. In a general market downturn, even a quality company may temporarily drop in price. Similarly, in a volatile market, demand for SPOs may be lower. Compare the terms of this offering with similar proposals (in the same industry or with comparable financial characteristics) to gauge its competitiveness.

• Professional opinions. If possible, read analytical reports or expert assessments regarding the specific SPO. Brokerage or consulting firms often publish their views on upcoming offerings (how attractive they are). This can provide additional arguments for and against.

A comprehensive analysis of all these factors allows for making an informed decision on whether to buy or abstain from participation. It is unwise to base decisions solely on the promotion surrounding the SPO or on emotional reactions ("everyone is participating"). Strict adherence to one's investment criteria and risk management will make participation in a secondary offering justified.

Recommendations for Investors

Before participating in an SPO, investors may find it useful to follow a set of rules and general recommendations:

• Review the official prospectus and any publicly available materials from the company about the offering. Do not neglect any information, especially details regarding the use of funds and potential risk factors.

• Diversify risks. Do not invest too large a share of your portfolio in a single SPO. Diversification is a key principle. If the offering does not meet expectations, the loss will be limited to the proportion of invested funds rather than the entire portfolio.

• Compare prices. Before purchasing, assess the offer price relative to current stock quotes. If the offering is significantly more expensive than the current price, think twice. Sometimes, it may be more advantageous to buy shares on the secondary market, especially if the stock is liquid.

• Clarify the application procedure. Understand how to purchase shares – through a broker via open subscription or another method. If the offering is available only to large investors, inquire about the minimum lot. Some venues only allow retail investors to submit indicative bids.

• Assess liquidity. When planning to exit a position, consider that shares may trade with lower volume for some time after an SPO. Avoid rushing to sell on the first day of trading – prices may be volatile. It is better to decide in advance whether you will hold the shares for weeks or months.

• Keep track of deadlines. Be aware of key offering dates: subscription start, application deadline, and trading commencement date. Set reminders so as not to miss the buying period, and ensure funds are available in the brokerage account if necessary.

• Consult if needed. If questions remain unclear (especially about complex legal aspects of the prospectus), it makes sense to discuss them with a financial consultant or broker specialist. Making an informed choice requires understanding all terms.

Applying these recommendations will help investors prepare for purchasing shares as part of an SPO and minimize the likelihood of errors. Relying solely on "friends’ advice" or promotional messages is not advisable: successful investments are built on thorough analysis and personal strategy.

Conclusion

The Secondary Public Offering (SPO) is an important instrument in the stock market, enabling companies to attract additional capital after going public. For issuers, it is a means to finance growth, reduce debt burden, or fulfill obligations to shareholders without increasing credit liability. For investors, SPOs open additional investment opportunities: they can purchase shares under known conditions, participating in the company’s further development prospects.

In Russia, the SPO mechanism is gradually improving alongside the general development of the securities market. Although the Russian market for such offerings currently lags behind leading global venues, the trend towards an increasing number of SPOs is evident. Foreign experience shows that as transparency and trust in the market increase, secondary offerings become a common occurrence: they enhance capitalization and liquidity in the sector.

Investors should keep in mind that while participating in an SPO can be beneficial, it always carries market risks. The decision to purchase should be based on an analysis of the offering conditions, the issuer's financial indicators, and the overall market situation. A balanced approach and sound assessment will enable the use of SPOs as one of the effective tools in shaping an investment portfolio.

Thus, secondary share offerings serve as a link between business financing needs and investors looking for new investment opportunities. With a proper understanding of all SPO details, they can contribute to the growth of companies and offer investors promising long-term positions in the stock market.