A primary offering, also called a primary distribution, is made the first time a company offers its stocks or securities for sale to investors, who can be employees of the firm or public traders. The funds obtained from the offering are made immediately available for the company’s use, to be reinvested into its structure or other companies based on its needs.
A primary offering does not have to include the public: it could be made exclusively to employees, but may also include customers or affiliates of a company. However, a primary offering usually occurs in the form of an Initial Public Offering, or IPO.
Many issues should be considered before a company’s first stock issuance. When a company first begins offering its stock it begins diluting ownership in the company. The investors will want to be able to voice their own opinions, suggestions, or concerns on the operation of the company. This can cause a reduction in control for the company’s original owners, but it is sometimes worth the influx of equity capital that results. Before making a primary offering—especially an IPO—a company should very carefully consider the purpose involved, and may also want to obtain the services of a qualified and knowledgeable investment bank to assist it in its actions.
A primary offering is not the only option a company has for capital. Debt financing, in the form of loans, is another source of funding. Also, venture capitalists are available for some companies, as well as angel investors and other situations.
These are all forms of external financing. Companies may want to increase their internal funding first, in the form of becoming more efficient, using less capital for operations, better training and methodology, etc.
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