Seasoned Issue

What Is a Seasoned Issue?

A seasoned issue is an issue of additional securities from a laid out company whose securities as of now trade in the secondary market. A seasoned issue is otherwise called a seasoned equity offering or follow-on public offering (FPO). New shares issued by blue-chip companies are considered seasoned issues. Outstanding bonds trading in the secondary markets are additionally called seasoned issues.

How a Seasoned Issue Works

Seasoned issues are handled by equity underwriters working for the company giving the new shares. The company will base the price of the new shares on the market price of the outstanding shares. Commonly, equity underwriters are investment banks that spend significant time in working with publicly traded companies to guarantee the seasoned issue meets generally regulatory requirements. With an end goal to work with the sale of the new shares, the underwriters will likewise advise large institutional investors of the impending stock sale.

A seasoned issue ought not be confused with an initial public offering (IPO). An IPO happens when a private company transitions to a publicly traded company where investors can buy and sell shares on a stock exchange. The IPO addresses whenever public investors first can purchase shares of the company. A seasoned issue, on the other hand, happens when the management of an existing publicly traded company chooses to sell additional shares of stock to fund-raise.

Types of Seasoned Issues

Dilutive Seasoned Issues

A seasoned issue that consists of new shares can considerably dilute the holdings of existing shareholders since it builds the total amount of shares on the secondary market. Current shareholders will experience a reduction in their percentage of equity ownership in the company. As the company issues more shares, each existing shareholder claims a more modest part of the company, in this manner weakening or diminishing the value of each share.

The risks of share dilution can negatively impact the value of a shareholder's investment and lead to a decline in the company's share price as investors respond by selling-off the company. Subscription rights are one way a company can safeguard shareholders from a portion of the effects of dilution. Subscription rights give existing shareholders the right to purchase shares of the seasoned issue, frequently at a discounted price, before the company opens up the new shares to the more extensive market.

Non-Dilutive Seasoned Issues

Seasoned issues from existing shareholders, in any case, don't weaken existing shareholders as this scenario doesn't make additional shares. By and large, seasoned issues from existing shareholders include founders or different managers, (for example, venture capitalists) selling all or a portion of their stakes in a company.

Here a company's unique IPO incorporated a "secure" period during which the establishing shareholders were prohibited from selling their shares. Seasoned issues, subsequently, are a preferred method for establishing shareholders to monetize their positions.

Analysis of Seasoned Issues

Companies will habitually issue new shares as a method for fund-raising to fund new undertakings or to pay down debt. Investors might construe a seasoned issue as a sign the company is having financial issues. They might see it as a signal the company is running short on cash. This news can cause the price of both the outstanding shares and the new shares to fall. Investor sentiment might turn negative against the company as existing shareholders experience the financial impact of share dilution.

Likewise, selling large volumes of shares — particularly one that is thinly traded — can make downward pressure on a stock's price. Therefore, an investor really should consider various angles of a company's financial wellbeing while considering buying into a seasoned issue.

Instances of a Seasoned Issue

Consider Company ABC, a public company that needs to sell additional shares in a seasoned issue to fund-raise for another factory. To achieve this outcome, Company ABC employs an investment bank to do the underwriting, register it with the Securities and Exchange Commission (SEC), and handle the sale. The company gets the funds from the sale of the securities and is then able to utilize those funds to build their factory. In this model, the seasoned issue was dilutive to existing shareholders.

Private investors can likewise start a seasoned issue. Consider a well off investor with an extremely large block of Company XYZ shares, perhaps 500,000 shares. In this type of seasoned issue, the private investor will get the proceeds from the sale of the shares rather than the public company. This type of seasoned issue doesn't weaken outstanding shares.

Features

• Non-dilutive seasoned issues are while existing shareholders who hold large amounts of stock sell all or a portion of their stakes in a company.
• A seasoned issue can weaken the holdings of existing shareholders since it expands the total amount of shares on the secondary market, in this manner weakening or decreasing the value of each share.
• A seasoned issue is the point at which a publicly traded company issues new shares of stock to fund-raise.
• Existing shareholders might see a seasoned issue in a negative light and the news can prompt the price of both the outstanding shares and the new shares to fall.
• The company generally utilizes the money from the seasoned issue to pay down debt or to fund new undertakings.