Question 1

What is the capital raised in an IPO, and who actually receives it?

Accepted Answer

The capital raised is the money new investors pay for the shares sold in the offering. Only the sale of primary shares — newly issued securities the issuer sells for its own account — produces proceeds for the company; shares sold by existing holders (secondary shares) produce proceeds for those holders, not for the issuer. Regulation S-K Item 501(b)(3) (17 CFR 229.501(b)(3)) makes the split explicit on the outside front cover of the prospectus. For a cash offering it requires the registrant to show 'the price to the public of the securities, the underwriter's discounts and commissions, the net proceeds you receive, and any selling shareholder's net proceeds,' on both a per share (or per unit) basis and for the total amount of the offering. The rule thus separately identifies what the company receives from what selling shareholders receive — a distinction that turns on whether the shares are primary (issued by the company) or secondary (sold by existing holders). How the price itself is set is addressed on the Bookbuilding and Pricing page.

Question 2

How do primary shares raise capital for the issuer?

Accepted Answer

Primary shares are securities the issuer newly issues and sells in the offering. Because the issuer is the seller of these shares, the sale proceeds are paid to the company, making primary shares the only part of an offering that raises capital for the issuer. Securities Act Section 2(a)(4) (15 U.S.C. 77b(a)(4)) defines an 'issuer' as 'every person who issues or proposes to issue any security.' When the issuer issues new shares and sells them, the consideration flows to the issuer. Regulation S-K Item 504 (17 CFR 229.504) frames the amount the company keeps as the 'net proceeds to the registrant from the securities to be offered,' and Item 501(b)(3) shows the 'net proceeds you receive' on the cover. A company can also combine primary and secondary shares in one offering; only the primary portion adds to the company's capital.

Question 3

Why do secondary shares raise no capital for the issuer?

Accepted Answer

Secondary shares are already-outstanding securities sold for the account of existing holders. Because the seller is the security holder rather than the company, the proceeds are paid to that holder; the issuer neither issues new shares nor receives any of the money. Securities Act Section 2(a)(3) (15 U.S.C. 77b(a)(3)) defines a 'sale' to include 'every contract of sale or disposition of a security or interest in a security, for value,' so a selling holder's disposition of existing shares is a sale — but it is the holder's sale, not the issuer's. Regulation S-K Item 507 (17 CFR 229.507) governs the disclosure of these holders, and Item 501(b)(3) shows 'any selling shareholder's net proceeds' as a line separate from 'the net proceeds you receive.' An offering made up entirely of secondary shares (a pure secondary offering) therefore raises no capital for the company at all.

Question 4

How is the total amount of capital raised determined?

Accepted Answer

The aggregate (gross) proceeds of an offering equal the price to the public per share multiplied by the number of shares sold. Both the per-share price and the total are shown on the prospectus cover. Regulation S-K Item 501(b)(3) (17 CFR 229.501(b)(3)) requires the price to the public to be shown 'on both a per share or unit basis and for the total amount of the offering.' The size of the offering (the number of shares) and the offering price are the two inputs that set the gross proceeds. How the offering price is arrived at is the subject of Item 505, Determination of offering price (17 CFR 229.505), which requires a registrant with no established public trading market for its common equity to describe the factors considered in setting the price; the pricing mechanics are covered on the Bookbuilding and Pricing page.

Question 5

What is the difference between gross proceeds and net proceeds?

Accepted Answer

Gross proceeds are the total price paid by the public for the shares sold. Net proceeds to the issuer are what remain after deducting the underwriting discounts and commissions, and, in practice, the other expenses of issuance and distribution. Regulation S-K Item 501(b)(3) (17 CFR 229.501(b)(3)) requires the cover to show 'the price to the public of the securities, the underwriter's discounts and commissions, [and] the net proceeds you receive' — so the net-proceeds line is the price to the public less the underwriting discounts and commissions. Separately, Item 511 (17 CFR 229.511) calls for 'a reasonably itemized statement of all expenses in connection with the issuance and distribution of the securities to be registered, other than underwriting discounts and commissions'; those expenses further reduce the cash the issuer ultimately retains. It is the net proceeds — not the gross — that Item 504 requires the registrant to allocate in the Use of Proceeds disclosure.

Question 6

What other offering expenses reduce the capital the issuer keeps, and who bears them?

Accepted Answer

Beyond the underwriters' discounts and commissions, an offering carries other expenses of issuance and distribution — such as registration, legal, accounting, and printing costs. These are disclosed under Item 511, and where existing holders are selling, the portion of those expenses they bear must be indicated. Regulation S-K Item 511 (17 CFR 229.511) requires the registrant to 'furnish a reasonably itemized statement of all expenses in connection with the issuance and distribution of the securities to be registered, other than underwriting discounts and commissions.' The item adds: 'If any of the securities to be registered are to be offered for the account of security holders, indicate the portion of such expenses to be borne by such security holder.' These offering expenses are distinct from the underwriting discounts and commissions shown on the cover under Item 501(b)(3); together the two reduce gross proceeds to the net amount the issuer actually retains.

Question 7

How is the capital-raise figure presented when the price is not yet fixed, or on a minimum/maximum basis?

Accepted Answer

When a preliminary prospectus circulates before the price is set, a non-reporting registrant provides a bona fide estimate of the maximum offering price range and maximum number of securities. If the offering is made on a minimum/maximum basis, the proceeds information is shown for both the total minimum and total maximum amount. Instruction 1 to Regulation S-K Item 501(b)(3) (17 CFR 229.501(b)(3)) provides that, where a preliminary prospectus is circulated and the registrant is not subject to Exchange Act Section 13(a) or 15(d) reporting, it must give 'a bona fide estimate of the range of the maximum offering price and the maximum number of securities offered' (or, for debt, the principal amount). The body of Item 501(b)(3) adds that 'if you make the offering on a minimum/maximum basis, show this information based on the total minimum and total maximum amount of the offering.' These rules govern how the still-uncertain proceeds figure is disclosed before the final price is determined at pricing.

Question 8

How can an over-allotment (green shoe) arrangement change the capital raised?

Accepted Answer

If the underwriter has an arrangement to purchase additional shares in connection with the offering — an over-allotment, or green shoe, option — the cover must state that the arrangement exists and the amount of additional shares. Exercising it increases the number of shares sold and therefore the proceeds. Regulation S-K Item 501(b)(2) (17 CFR 229.501(b)(2)) provides: 'If the underwriter has any arrangement with the issuer, such as an over-allotment option, under which the underwriter may purchase additional shares in connection with the offering, indicate that this arrangement exists and state the amount of additional shares that the underwriter may purchase under the arrangement.' Where the additional shares are primary shares, their sale on exercise adds to the issuer's proceeds; where they are secondary shares, the additional proceeds go to the selling holders. The size limits and mechanics of the option itself are addressed on the Over-Allotment Option page.

Question 9

What is dilution to new investors, and what does Item 506 require be disclosed?

Accepted Answer

Dilution to new investors is the amount by which the price they pay per share exceeds the company's net tangible book value per share immediately after the offering — the immediate dilution from the public offering price that those purchasers absorb. Where it applies, Item 506 requires disclosure quantifying that dilution. Regulation S-K Item 506 (17 CFR 229.506) requires disclosure of: '(a) The net tangible book value per share before and after the distribution; (b) The amount of the increase in such net tangible book value per share attributable to the cash payments made by purchasers of the shares being offered; and (c) The amount of the immediate dilution from the public offering price which will be absorbed by such purchasers.' In substance, this measures how much of what new investors pay per share is already reflected in book value versus how much is an immediate write-down of the price they paid. Item 506 is a distinct disclosure from the Use of Proceeds statement: dilution shows the value new investors give up, while Use of Proceeds shows how the cash they contribute will be deployed.

Question 10

When is the Item 506 dilution disclosure triggered?

Accepted Answer

Item 506 applies where common equity securities are being registered and either there is a substantial disparity between the public offering price and the effective cash cost of common equity acquired by insiders (and the company was not already an Exchange Act reporting company before filing), or the company has had losses in each of its last three fiscal years with a material dilution of purchasers' equity interest. Regulation S-K Item 506 (17 CFR 229.506) is triggered where common equity is being registered and 'there is substantial disparity between the public offering price and the effective cash cost to officers, directors, promoters and affiliated persons of common equity acquired by them in transactions during the past five years, or which they have the right to acquire, and the registrant is not subject to the reporting requirements of section 13(a) or 15(d) of the Exchange Act immediately prior to filing.' In that case a comparison of the public contribution and the insiders' effective cash contribution must be included. The item's disclosure also applies 'in other instances where common equity securities are being registered by a registrant that has had losses in each of its last three fiscal years and there is a material dilution of the purchasers' equity interest.' The five-year look-back and the not-yet-reporting condition make the item especially relevant to first-time issuers pursuing an IPO.

Question 11

How does issuing primary shares change the company's share capital compared with a secondary sale?

Accepted Answer

Issuing primary shares creates new shares and brings new cash into the company, increasing the shares outstanding and the company's capital. A secondary sale transfers existing shares between holders, so it changes neither the number of shares outstanding nor the company's capital. Under Securities Act Section 2(a)(4) (15 U.S.C. 77b(a)(4)) the issuer is the person who issues the security; only the issuance and sale of new (primary) shares adds shares and cash to the company. Because new investors in a primary offering typically pay more per share than the post-offering net tangible book value, Regulation S-K Item 506 (17 CFR 229.506) measures the immediate dilution those cash purchasers absorb. Secondary shares are already outstanding, so their sale reallocates ownership without adding shares or capital; the disclosure that governs those holders is Item 507, not Item 506.

Question 12

How does the capital raised connect to the Use of Proceeds disclosure?

Accepted Answer

Item 504 requires the prospectus to state the principal purposes for which the net proceeds to the registrant are intended to be used. Only the net proceeds from primary shares are within that disclosure; proceeds paid to selling security holders are not received by the company and fall outside it. Regulation S-K Item 504 (17 CFR 229.504) requires the registrant to 'state the principal purposes for which the net proceeds to the registrant from the securities to be offered are intended to be used and the approximate amount intended to be used for each such purpose.' The phrase 'net proceeds to the registrant' ties Use of Proceeds directly to the primary-share portion of the raise; where a registrant has no current specific plan for the proceeds, or a significant portion of them, it must say so and discuss the principal reasons for the offering. The seven Instructions to Item 504 (order of priority, debt repayment, acquisitions, and the reservation of the right to change use) are detailed on the Use of Proceeds page.

Question 13

What must be disclosed about selling security holders and the shares they sell?

Accepted Answer

For any securities offered for the account of security holders, Item 507 requires the registrant to name each selling holder, describe any material relationship with the company in the past three years, and state the amount owned before the offering, the amount offered, and the amount (and, if one percent or more, the percentage) owned after the offering. Regulation S-K Item 507 (17 CFR 229.507) requires that, if any of the securities to be registered 'are to be offered for the account of security holders,' the registrant 'name each such security holder, indicate the nature of any position, office, or other material relationship which the selling security holder has had within the past three years with the registrant or any of its predecessors or affiliates, and state the amount of securities of the class owned by such security holder prior to the offering, the amount to be offered for the security holder's account, the amount and (if one percent or more) the percentage of the class to be owned by such security holder after completion of the offering.' This disclosure identifies who is selling secondary shares and how much liquidity they are taking — the counterpart to the Item 504 statement of how the company's own net proceeds will be used.

Element of the capital raise	Governing authority	What it determines or requires
Primary shares (issuer's newly issued shares)	Securities Act §2(a)(4) (15 U.S.C. 77b(a)(4)) · source	The issuer is 'every person who issues or proposes to issue any security'; the sale of these newly issued shares is the only part of the offering that produces net proceeds for the company.
Secondary shares (selling holders' shares)	Reg S-K Item 507 (17 CFR 229.507) · source	Already-outstanding shares sold for the account of existing holders; the proceeds go to those holders, not the issuer, and each selling holder is named with the amount owned before, offered, and owned after the offering.
Price to the public × shares sold (aggregate offering price)	Reg S-K Item 501(b)(3) (17 CFR 229.501) · source	The price to the public is shown per share and for the total offering; multiplied by the number of shares sold, it is the gross proceeds of the offering.
Underwriting discounts and commissions	Reg S-K Item 501(b)(3) (17 CFR 229.501) · source	The underwriters' compensation, deducted from the price to the public so the cover can show 'the net proceeds you receive' and any selling shareholder's net proceeds.
Other expenses of issuance and distribution	Reg S-K Item 511 (17 CFR 229.511) · source	A reasonably itemized statement of all issuance and distribution expenses other than underwriting discounts and commissions; where holders sell, the portion of those expenses they bear must be indicated.
Net proceeds to the registrant	Reg S-K Item 504 (17 CFR 229.504) · source	The amount the issuer receives after those deductions; Item 504 requires the prospectus to state the principal purposes for which these net proceeds are intended to be used.
Over-allotment (green shoe) arrangement	Reg S-K Item 501(b)(2) (17 CFR 229.501) · source	If the underwriter may purchase additional shares in connection with the offering, the cover must state the arrangement exists and the amount of additional shares; exercise increases the shares sold and the proceeds.
Dilution to new investors	Reg S-K Item 506 (17 CFR 229.506) · source	Where triggered, disclosure of net tangible book value per share before and after the offering, the increase attributable to purchasers' cash payments, and the immediate dilution from the offering price absorbed by those purchasers.

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