Secondary distribution definition
/A secondary distribution is the sale of a large number of shares by one or more large investors. The sale is handled by a securities firm and so is not conducted through a stock exchange. The proceeds of the sale go to the investors holding the stock, not the issuing entity. The price at which the shares are offered is usually close to the market price of the shares. This is not a new issuance of shares, so the total number of shares outstanding for the issuer remains the same.
A secondary distribution differs from a primary distribution, where the selling entity is the issuing corporation.
Example of a Secondary Distribution
A private equity firm owns a significant stake in Tarantula Corporation, a publicly traded company. The private equity firm decides to sell 5 million shares of Tarantula that it already owns.
Instead of selling the shares on the open market, which could potentially disrupt the stock price, the private equity firm coordinates with an investment bank to conduct a secondary offering. The investment bank helps find buyers for these shares through a block trade, offering them to institutional investors like mutual funds, hedge funds, or pension funds at a pre-agreed price.
In this scenario, Tarantula does not receive any proceeds from the sale since these are existing shares. Instead, the private equity firm benefits from the proceeds.