The story of GameStop (NYSE:GME) and its epic short squeeze has captured the attention of people all over the world. What seemed to be a failing video game retailer suddenly was on top of the world, with a soaring stock price that seemed to signal better times ahead.

Unfortunately, after going from $17 to $483 per share in the span of a few weeks during 2021, the stock subsequently fell back to earth. It lost between 85% and 90% of its value and is seemingly destined to sustain a downward trajectory.

Looking back on what happened with GameStop, the obvious question many people have is why the company didn't take advantage of its good fortune to bolster the chances of surviving its tough times. Specifically, when investors were willing to pay such high prices to obtain shares of GameStop stock, why didn't GameStop itself accommodate them by offering its own stock and raising a ton of cash in the process?

Bundles of cash piled on top of each other.

Image source: Getty Images.

There's a simple answer, which you'll find below. But first, let's look at how often companies do exactly what GameStop apparently couldn't in this situation.

The basics of secondary stock offerings

Most people are familiar with initial public offerings (IPOs). That's when a company first offers shares of its stock to the general investing public. IPOs often generate a lot of hype because they represent the first chance most people get to invest in a particular business.

Less glamorous but more frequent, however, are secondary stock offerings. Here, companies that are already public decide to sell additional shares of their stock in order to raise cash. What they do with the proceeds depends on the situation. Some companies use it to pay down debt, while others finance acquisitions or use it to invest on growing their own businesses internally.

Obviously, companies prefer to do secondary stock offerings when their shares are high. For example, you'll often see companies in the biotech and pharmaceutical space do secondary stock offerings immediately after getting good news about a candidate drug or treatment. Moderna, for instance, sold a substantial chunk of stock in May 2020 after seeing its stock soar due to the prospects for its mRNA-1273 coronavirus vaccine candidate. With the stock price spiking higher, it was a great time for the biopharma company to get much-needed cash for clinical trials and marketing efforts.

You'll also see companies selling stock at relatively low levels when they need cash. Cruise-ship stocks have been notorious over the past year for this. Carnival and others did multiple offerings of stock in order to pay for ongoing expenses while their vessels remain in port due to the COVID-19 pandemic.

Why isn't GameStop lining up for all this cash?

Given the successes that Moderna has had getting its vaccine into production and Carnival has had in keeping its business afloat, you'd think that GameStop would be first to sell stock for hundreds of dollars per share. Indeed, the company had filed a registration statement to sell up to $100 million in stock.

As of its most recent quarterly filing, the video game retailer had about 70 million shares outstanding. Even a small 1 million share offering could have raised hundreds of millions of dollars for the company to shore up its balance sheet, upgrade stores, build out e-commerce capabilities, or a host of other potential uses. A larger offering could've ensured ample cash for long-term survival and growth -- and without diluting existing shareholders nearly as much as companies like Carnival have.

Yet GameStop probably wouldn't have been allowed to do a secondary stock offering during the short squeeze. The U.S. Securities and Exchange Commission probably would have prevented it from happening.

As precedent, consider the case of Hertz Global Holdings (OTC:HTZG.Q). Back in June 2020, the SEC took similar action in stopping a secondary stock offering from the car rental giant. Hertz had seen its stock jump despite filing for bankruptcy protection, leaving very little chance for shareholders to recover anything in the long run. Seeking to do as much as possible to ensure creditors would get a full recovery, Hertz sought to sell stock at its then-elevated price.

However, Hertz suspended plans for the offering when the SEC reviewed the transaction. A day later, Hertz pulled the deal, saying that not selling stock was in the best interest of the company. Months later, the stock still trades at elevated levels, but Hertz hasn't moved forward.

No easy answer for GameStop

Doing a secondary offering also would've involved huge potential liability. No matter how explicit GameStop was in saying that its stock was unreasonably valued, investors would've come back and filed legal actions against the company when its share price dropped. The resulting hassle, expense, and bad reputation wouldn't have served GameStop well.

Curiously, fellow short-squeeze stock AMC Entertainment Holdings (NYSE:AMC) did end up doing a secondary stock offering. However, AMC only netted about $5 per share in the offering -- well over its $2 per-share price from earlier in the year, but far below the $20 per-share peak. So far, AMC's stock price has stayed above that $5 mark -- but if it falls further, it'll be interesting to see whether those who participated in the offering cry foul.

As GameStop's share price sinks back to earth, some will wonder what might have been if the company had been able to take advantage of high share prices to raise cash. Now, the road to recovery will be much more difficult for GameStop to navigate.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.