What is a Secondary Distribution?

A secondary distribution, also known as a secondary offering, is a sale of a big block of existing securities by the person or institution that holds them. In secondary distributions, although securities are being sold in large blocks as they are in an initial public offering, the securities holder receives the profit from the sale, rather than the company that initially offered the securities. Additionally, the number of securities on the market does not change, because no new securities are being generated.

Most commonly, institutional investors and corporations make arrangements for a secondary distribution. They can opt to sell large blocks of shares for a variety of reasons ranging from a desire to raise capital to a need to diversify a portfolio. The sale is typically handled by a securities broker or investment bank that takes charge of the process of distributing the securities in a way that will not destabilize the market.

The price at sale is typically fixed and based on the current value of the security involved. The institution handling the sale can discuss the options with the institution holding the securities to determine what the sale price should be and how the secondary distribution should be offered. The goal is to get the best value out of the securities and this requires timing the sale of the securities carefully.

Typically, a secondary distribution takes place outside a primary stock market. The blocks are usually bought by other corporations and institutions as they are often the only investors that can afford to buy securities in bulk blocks. However, private investors can also be involved in the sale and purchase of blocks of securities. People with a high net worth and significant investments may buy securities in large blocks with the goal of holding a secondary distribution later to sell them at a profit once their value starts to rise.

Because of the size of the transaction, the sale must usually be registered with regulators. The regulators have an opportunity to turn down the sale if they are concerned that it could have a negative impact on the market. In addition, if securities are listed publicly with a stock exchange, the exchange must grant permission for sales to take place off the trading floor. Since trading in such volume could destabilize floor trading significantly if it took place on the floor, there are distinct advantages for the stock exchange when it comes to approving a secondary distribution.