SPOs occur as one of two types: dilutive and non-dilutive. The basic difference is what happens to the stock’s price per share as a direct result of the SPO.
In a dilutive secondary public offering, new common shares are created and offered for public sale. To understand why, let’s take a closer look at what a dilutive offering is and why it will directly result in the lowering of a company’s share price.
The price of a company’s stock follows the general formula:
Net income – dividends/outstanding common shares
If the denominator increases significantly, simple math dictates that the overall price per share will go down. In other words, it has a dilutive effect. A shareholder has not sold any shares, but the value of their holdings (on a per share basis) has decreased.
A non-dilutive secondary public offering is essentially a private sale of common shares. In a non-dilutive SPO, a large shareholder, or a group of major shareholders, sell all or some of their holdings. The proceeds from this sale go to the stockholders that sell their shares. In this way, there is no addition of common shares (i.e. the company has not increased the amount of stock that is held by investors). This is why this type of secondary public offering is considered a non-dilutive event.
With that said, there are times when a stock’s price may fall after a non-dilutive SPO, but that is due to normal market activity, not because the number of shares has increased.