We extend the capital gain lock-in model developed in Klein (1998) to explain the drop in the price of a company's shares when it conducts an SEO. We show that investors which are locked-in may not be willing to participate in an SEO. As a result, the equilibrium price after the SEO needs to be lower than it would be otherwise in order that the remaining investors are willing to bear the additional investment risk of the SEO. We provide numerical examples to demonstrate our theoretical results. Our theory is well supported by empirical tests of SEO issue-day returns using data on the accrued capital gains of tax-sensitive and tax-insensitive institutional investors.