An equity issue is a company’s sale of newly created shares of stock to raise capital, increasing the total shares outstanding and bringing in cash the company never has to repay. The form it takes depends on whether the company is already public, who it wants to sell to, and how much regulatory oversight applies. Companies use the proceeds to fund growth, pay down debt, or strengthen the balance sheet, and each type of offering carries its own rules for how shares can be sold and to whom.
The Main Types of Equity Issues
The method a company uses to sell new stock depends on its listing status and the pool of investors it wants to reach.
Initial Public Offering
An IPO is the first time a private company sells stock to the general public. The company files a registration statement with the Securities and Exchange Commission, and once the SEC declares it effective, shares begin trading on a stock exchange.1U.S. Securities and Exchange Commission. Going Public The IPO converts the company from private to public and gives early investors and founders a path to eventually sell their stakes.
Follow-On Public Offering
A follow-on offering is a sale of additional shares by a company that is already publicly traded. In a primary follow-on, the company creates new shares and keeps the cash. In a secondary follow-on, existing large shareholders sell some of their own holdings, and the proceeds go to them, not the company.
Private Placement
A private placement sells securities directly to a small group of qualifying investors and skips full public registration. These offerings rely on exemptions under Regulation D of the Securities Act.2eCFR. 17 CFR 230.500 – Use of Regulation D Under Rule 506(b), the most common exemption, the company can sell to an unlimited number of accredited investors plus up to 35 non-accredited investors, but it cannot use general advertising. Rule 506(c) allows broad marketing, but every purchaser must be accredited.3U.S. Securities and Exchange Commission. Exempt Offerings
To qualify as an accredited investor, you need a net worth above $1 million (excluding the value of your primary residence) or individual income above $200,000 in each of the two most recent years, with a reasonable expectation of the same this year. Joint income with a spouse or partner of $300,000 meets the threshold as well.4U.S. Securities and Exchange Commission. Accredited Investors
Rights Offering
A rights offering gives existing shareholders the first chance to buy newly issued shares, usually at a discount to the market price. Rights are distributed in proportion to current holdings, so anyone who exercises in full keeps the same percentage of the company. Shareholders who don’t want to participate can sometimes sell their rights on the open market, depending on the terms.
Shelf Registration
A shelf registration lets a company file one registration statement with the SEC and then sell securities off that shelf in batches over time, without going through a fresh registration each time. Companies using Form S-3 for this purpose generally need a public float of at least $75 million in voting and non-voting common equity held by non-affiliates, plus at least 12 months of timely SEC filings.5U.S. Securities and Exchange Commission. Form S-3 When the stock price is favorable or an acquisition target appears, the company can tap the shelf and raise money in days rather than months.
How a Public Equity Issue Gets Done
Bringing a public offering to market runs from a few months to well over a year, depending on the company’s readiness and how the SEC review goes.
Board Approval and Underwriter Selection
The board formally authorizes the offering, and the company selects one or more investment banks to serve as underwriters. The lead underwriter structures the deal, coordinates due diligence, and typically guarantees the sale by agreeing to purchase any unsold shares (a firm commitment underwriting). That guarantee is why the choice matters: the bank’s reputation and distribution network directly affect pricing and demand.
Registration and SEC Review
Federal law prohibits selling securities to the public unless a registration statement is in effect or an exemption applies.6Office of the Law Revision Counsel. 15 USC 77e – Prohibitions Relating to Interstate Commerce and the Mails For most IPOs, the company files Form S-1, which requires detailed disclosure of the business, financial statements, risk factors, planned use of the proceeds, and the terms of the offering.7U.S. Securities and Exchange Commission. Form S-1 SEC staff review the filing and send comment letters asking for clarification or additional disclosure. The company cannot sell any shares until the SEC declares the registration effective.8U.S. Securities and Exchange Commission. What Is a Registration Statement
Roadshow and Book Building
While the registration is under review, the company and its underwriters begin marketing. The roadshow is a series of presentations to institutional investors (pension funds, mutual funds, hedge funds) designed to build demand and gauge what price the market will support. Underwriters collect non-binding indications of interest through a process called book building. That demand picture drives the final offering price, which the company and lead underwriter negotiate shortly before shares begin trading.
What an Equity Issue Costs
Selling stock is not cheap. The largest single expense is the underwriting spread, the difference between the price the underwriters pay the company for the shares and the price at which they resell them to investors. For IPOs of roughly $20 million to $200 million in proceeds, the gross spread has been remarkably consistent at 7% of total proceeds. Billion-dollar offerings typically command a lower spread, averaging closer to 4.5% to 5%.
Beyond the spread, the company pays legal fees, accounting and audit costs, SEC filing fees, stock exchange listing fees, and printing costs for the prospectus. For a mid-size IPO, these can easily run $2 million to $5 million. Follow-on offerings tend to be less expensive because the reporting infrastructure is already in place, but the spread still represents the bulk of the cost. Offering expenses do not run through the income statement as operating expenses; they reduce Additional Paid-in Capital directly, so the balance sheet reflects only the net cash the company actually received.9Deloitte Accounting Research Tool. Deloitte’s Roadmap – Distinguishing Liabilities From Equity – Section: 10.2.1 Recognition
How an Equity Issue Affects Existing Shareholders
Every new issue reshuffles the ownership math for people who already hold stock. Some effects are pure arithmetic; others are subtler shifts in influence and market perception.
Ownership Dilution
Dilution is the most immediate consequence. If you own 100,000 shares of a company with 1 million shares outstanding, you hold 10%. If the company issues 250,000 new shares, total shares jump to 1.25 million and your stake drops to 8%, even though you still hold the same number of shares. If the company raises money at a fair valuation, the value of each share shouldn’t fall, and your smaller slice is a slice of a bigger pie. But “fair valuation” is a judgment call, and plenty of offerings are priced at a discount to the market.
Voting Power
Each share of common stock typically carries one vote on matters like board elections and major transactions. When new shares are issued, the total vote count rises and your relative influence drops by the same proportion as your ownership percentage. For retail investors this rarely matters in practice. For activist shareholders or founders holding a controlling block, a few percentage points of dilution can shift the balance in a proxy fight.
Pre-Emptive Rights
Some corporate charters include pre-emptive rights, which give existing shareholders the option to buy their proportional share of any new offering before outside investors get access. If you own 5% and the company issues 100,000 new shares, you can purchase 5,000 to maintain your stake. These rights are more common in smaller or closely held companies and are the mechanism behind rights offerings.
Lock-Up Agreements
In an IPO, insiders (founders, executives, early investors) typically sign lock-up agreements preventing them from selling shares for a set period after the offering. Most lock-ups last 180 days.10Investor.gov. Initial Public Offerings: Lockup Agreements No federal law requires them. They are contracts between the underwriters and the company’s insiders, designed to prevent a wave of selling that could sink the stock price in its first months of public trading. When the lock-up expires, insider sales often follow, and the price sometimes drops temporarily.
Market Perception
How the market reacts to a new issue depends largely on why the company is raising money. An offering to fund a specific acquisition or build a new facility is often received neutrally or even positively. An offering to “shore up the balance sheet” or cover “general corporate purposes” tends to spook investors because it can signal that management sees trouble ahead. The stock price often drops a few percent on the announcement day because investors assume the company wouldn’t dilute them unless it had to.
Tax Angles Worth Knowing
An equity issue raises different tax questions for the company selling shares and for the investors buying them.
The Company Side
Proceeds from selling stock are not taxable income to the company. The money is a capital contribution from shareholders, not revenue from business operations. That is one of the core advantages of equity financing over alternatives like selling assets or licensing intellectual property, both of which generate taxable income.
Qualified Small Business Stock
Investors who buy stock directly from a qualifying small C corporation may be eligible for a federal capital gains exclusion under Section 1202 of the Internal Revenue Code. For shares issued on or after July 5, 2025, the issuing corporation must have gross assets of $75 million or less at the time of issuance, and at least 80% of its assets must be used in an active trade or business. If you hold the stock for at least five years, up to 100% of the capital gain on the sale can be excluded from federal income tax, subject to a per-issuer cap of $15 million in excluded gains. Both the asset limit and the gain cap will adjust for inflation starting in 2027.
Not every business qualifies. The company must be a domestic C corporation operating in an eligible industry; services like consulting, law, financial services, and hospitality are generally excluded. And the stock must be acquired directly from the corporation in exchange for money, property, or services, not purchased on the secondary market.
Section 1244 Stock
Section 1244 offers a different benefit. If stock in a qualifying small corporation becomes worthless or is sold at a loss, you can treat up to $50,000 of the loss as an ordinary deduction ($100,000 on a joint return) rather than a capital loss.11Office of the Law Revision Counsel. 26 USC 1244 Ordinary losses offset regular income dollar-for-dollar; capital losses are capped at $3,000 per year against ordinary income. For investors in startups and other high-risk ventures, the distinction can save thousands in taxes if the company fails.
Legal Liability for the Registration Statement
The registration statement is the most consequential document in any public offering, and the law treats errors in it harshly. Section 11 of the Securities Act creates civil liability for any material misstatement or omission in a registration statement at the time it becomes effective.12Office of the Law Revision Counsel. 15 USC 77k – Civil Liabilities on Account of False Registration Statement The issuing company is strictly liable, meaning investors don’t need to prove the company intended to mislead anyone, only that the statement contained a material error.
The reach extends past the company. Anyone who signed the registration statement, every director at the time of filing, every underwriter, and any accountant or expert who prepared or certified part of the document can be held liable. Directors and underwriters can escape by proving they conducted reasonable due diligence and had no reason to believe the statement was inaccurate, but that defense requires showing they actually investigated. Selling securities without a registration statement or a valid exemption is itself a violation of federal law, and investors who bought unregistered securities can demand their money back through rescission rights.6Office of the Law Revision Counsel. 15 USC 77e – Prohibitions Relating to Interstate Commerce and the Mails
Resale Limits on Unregistered Shares
Shares acquired in a private placement or received as compensation rather than purchased on a public exchange are “restricted securities” and cannot simply be resold on the open market. Rule 144 under the Securities Act sets the conditions for eventually reselling them. If the issuing company files regular SEC reports, the holder must wait at least six months before selling. If the company does not file SEC reports, the holding period is one year.13U.S. Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities
Affiliates of the company (officers, directors, and large shareholders) face additional restrictions even after the holding period ends. They can sell no more than the greater of 1% of the outstanding shares or the average weekly trading volume over the prior four weeks in any three-month period, and they must file a notice with the SEC on Form 144 if the sale exceeds 5,000 shares or $50,000 in value.13U.S. Securities and Exchange Commission. Rule 144: Selling Restricted and Control Securities