Spot Secondary

Spot secondary is a market for the sale of a security that does not require a Securities and Exchange Commission (SEC) registration statement. Certain requirements must be met to avoid registration. A spot secondary offering is typically offered to institutional investors instead of the general public, and is closed the next business day after the offering is made. Investors in spot secondary trades typically expect a discount for executing the trade quickly.

The term spot in financial markets is short for “on the spot” and refers to immediate cash transactions with no or little delay. By contrast, futures markets trade in the future value of a commodity, bond or stock. In general the term secondary in financial markets refers to trades between a buyer and seller who are not the original issuers of the product. For example, the secondary mortgage market is where mortgages that have been sold by the original lender are packaged and resold to investors. But in the context of stock shares, secondary offerings can mean both third-party sales and sales by the original company after the initial public offering (IPO). Often companies will make a secondary stock offering after an IPO because they need to raise money, in which case new shares are issued. But in other cases, secondary offerings are held because major investors in the IPO are looking to sell.

Not all secondary share offerings are spot secondary. Conventional secondary offerings must be registered with the SEC, a time-consuming process meant to protect retail investors from misrepresentation or even fraud. A spot secondary offering is not registered with the SEC and, as such, can typically be performed more quickly than other types of secondary offerings. But because the SEC has not condoned the offering, spot secondary trades are generally limited to institutional investors, who presumably are more knowledgeable about the potential risks and rewards.

Shares that are issued through a spot secondary offering are typically priced at a discount to institutional investors, to encourage participation in what are usually cash transactions occurring overnight. A managing underwriter, or book runner, generally acts as an agent for the firm in purchasing, carrying and distributing the spot secondary offering.

Sometimes companies will issue spot secondary offerings when they want to raise money quickly from institutional investors. For example, in 2014 the VoIP and data networking company AudioCodes raised $29.7 million overnight by selling 4.025 million shares in the spot secondary offering. The shares were priced at an 11 percent discount to the previous day’s close.