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A seasoned equity offering (SEO) is a new issue of an equity security that has previously been placed in the market through a prior issuance. Although an SEO is a primary market transaction, it is not the first time that the security will actually be held by the general investing public; it simply adds to the number of outstanding shares.
Firms, generally, have two options for facilitating an SEO: a cash offer or a rights offer. In a cash offering, the new shares are issued to the public for cash, which results in a reduction of the proportional ownership of existing shareholders (i.e., dilution).
However, with a rights offering, existing shareholders are awarded rights to purchase the new shares, many times at a reduced cost relative to the market value. Existing shareholders can choose to exercise the rights, thereby retaining their proportional ownership, or they can sell the rights in the open market.
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Under either approach, issuing firms will typically employ an underwriter, who will serve a similar role as in an initial public offering (IPO)—overseeing legal, administrative, and marketing aspects of the issuance.
Nonetheless, since the security is already traded, there is less pricing risk, which implies the compensation (gross spread) received by the underwriter is much smaller than for an IPO. Further, this reduced pricing risk also results in a much lower degree of underpricing (almost nonexistent) relative to a typical IPO.
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