Offering: Definition, Types, and Examples in Finance

What Is an Offering?

An offering is the issue or sale of a security by a company. It is often used in reference to an initial public offering (IPO) when a company's stock is made available for purchase by the public, but it can also be used in the context of a bond issue.

An offering is also known as a securities offering, investment round, or funding round. A securities offering, whether an IPO or otherwise, represents a singular investment or funding round. Unlike other rounds (such as seed rounds or angel rounds), however, an offering involves selling stocks, bonds, or other securities to investors to generate capital.

How an Offering Works

Usually, a company will make an offering of stocks or bonds to the public in an attempt to raise capital to invest in expansion or growth. There are instances of companies offering stock or bonds because of liquidity issues (i.e., not enough cash to pay the bills), but investors should be wary of any offering of this type.

When a company initiates the IPO process, a very specific set of events occurs. First, an external IPO team is formed, consisting of an underwriter, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts. Next, information regarding the company is compiled, including financial performance and expected future operations. This becomes part of the company prospectus, which is circulated for review. 

Sometimes companies will issue what is known as a shelf prospectus, detailing the terms of multiple types of securities that it expects to offer over the next several years. The financial statements are then submitted for official audit, and the company files its prospectus with the SEC and sets a date for the offering.

Why IPOs Are Risky

IPOs, as well as any other type of stock or bond offering, can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading, and in the near future, there is often little historical data to use to analyze the company. Also, most IPOs are for companies that are going through a transitory growth period, which means that they are subject to additional uncertainty regarding their future values.

IPO underwriters work closely with the issuing body to ensure an offering goes well. Their goal is to ensure that all regulatory requirements are satisfied, and they are also responsible for contacting a large network of investment organizations in order to research the offering and gauge interest to set the price. The amount of interest received helps an underwriter set the offering price. The underwriter also guarantees a specific number of shares will be sold at that initial price and will purchase any surplus.

Secondary Offerings

A secondary market offering is a large block of securities offered for public sale that have been previously issued to the public. The blocks being offered may have been held by large investors or institutions, and the proceeds of the sale go to those holders, not the issuing company. Also called secondary distribution, these types of offerings are very different than initial public offerings and don't require nearly the same amount of background work.

Non-Initial Public Offerings vs. Initial Public Offerings

Sometimes an established company will make offerings of stock to the public, but such an offering will not be the first offering of securities for sale by that company. Such an offering is known as a non-initial public offering or seasoned equity offering.