Secondary Distribution

Nardin Foods sells 3 million newly issued shares in one offering, and in a separate deal a founder sells 3 million of her existing shares to the public. How does each transaction affect the number of shares outstanding?

1. A.Both increase the share count, because both place shares into public hands.Wrong. Moving existing shares to new owners changes who holds them rather than how many exist.
2. B.Neither changes the count, because the shares existed in registered form already.Wrong. Registration is a disclosure step, and the company genuinely creates new shares in its own offering.
3. C.The founder's sale increases the count; the company's sale does not.Wrong. This reverses the two, treating a transfer of existing stock as an act of creation.
4. D.The company's sale increases the count; the founder's sale does not.Correct. Only the issuer can create shares, and the founder is reselling what she already owned.

Why: The share count rises only when the issuer creates and sells new shares, which is what makes an offering primary and what dilutes existing holders' percentages. A founder selling her own stock is a secondary distribution: ownership moves from her to the buyers, she receives the proceeds, and the total outstanding is exactly what it was before. Both transactions may be registered and both may be underwritten, which is why the paperwork looks so similar. The distinguishing question is always whether the shares are newly created and whether the company is paid.

Corvane Systems registers the shares held by its existing owners, lists them on an exchange, and begins trading without selling any newly created shares and without an underwriting syndicate. What does the company receive?

1. A.The full market value of every share that trades on the first day of listing.Wrong. The proceeds of each sale belong to the shareholder who sold, never to the company.
2. B.Nothing, because only existing shares are being sold by their current holders.Correct. With no new shares issued, this is a distribution of existing stock and the issuer raises nothing.
3. C.The offering price less an underwriting spread negotiated with the exchange.Wrong. No syndicate purchased the shares, and exchanges do not collect an underwriting spread.
4. D.An amount equal to the increase in its market capitalization upon listing.Wrong. Market capitalization values the outstanding shares; it is not cash received by the company.

Why: Whether a company raises money depends on a single question: is it selling newly created shares? Here it is not, so despite a registration statement and an exchange listing, the proceeds flow to the selling shareholders. The company gains a public market for its stock, which gives existing holders liquidity and gives the company a currency for future transactions. Had Corvane included newly issued shares in the same registration, that portion would have been a primary offering and the company would have received those proceeds.