Suddenly theres all this buzz about lockups. And all
Did Facebooks founding investor Peter Thiel really
sink Facebook stock by selling about 20 million shares at
$19.27 to $20.69 each on August 16 and 17 just days
after the lockup expired?
How many shares of Groupon do its insiders still own, now
that the lockup is over and the shares are selling at about $4
a share, nearly 80 percent lower than the IPO price of $20 a
Why did Yelp shares jump more than 20 percent the first day
after its first lockup expired?
Lockups are nothing new to the IPO process. Indeed lockup
expirations are more blog chatter than significant news. They
refer to a period of time after a company has initially gone
public, usually between 90 to 180 days, during which company
insiders and major shareholders agree not to sell any of their
shares unless they are permitted to do so at the discretion of
IPO lockups are Wall Streets dirty little
secret. They are there, and they are not. Underwriters
insist that insiders will not be allowed to sell their shares
during the lockup, to assure that they wont bail out
en-masse and depress share price, thus
scaring away new investors. But more often than not
they allow a select number of insiders to sell, without
adequate warning or disclosure.
In the case of Facebook, the selling by insiders such
as Peter Thiel became so pervasive that CEO Mark
Zuckerberg had to publicly announce he would not sell any
of his shares for at least a year. He wanted to convince
investors that he and other managers were staying the course
and that the rampant insider selling was not a sign of
eroding confidence in the company.
Many bankers worry that insiders are using the
discretion of the underwriter provision to defeat
the intent of a lockup and that such discretionary sales are
disclosed only after the fact. Most important, the SEC has done
little to require greater timely disclosure of the process,
disclosure that might bring some order and greater transparency
to post-IPO trading.
In the case of LinkedIn, which went public on May 19, 2011
and whose 180 day lockup expired on November 19, 2011, the
company filed more than two dozen statements with the SEC, a
number of which are about changes in beneficial
ownership, that is, insiders trading stocks. Similarly,
Groupon filed more than two dozen statements with the SEC
during its lockup, a significant number of which denoted
changes in beneficial ownership.
A lockup period is intended to allow investors to observe a
company, says Robert Raucci of Newlight Management, an
investment management firm that focuses on technology
companies. The idea is to protect the public from insiders
dumping stock and to allow the market to develop without
pressure from sales by major shareholders, adds Raucci.
The lockup is also intended to modulate the amounts of stock
that insiders can sell in one fell swoop. Selling
pressure from insiders could depress prices and create an
overhang that would inhibit potential buyers, notes
attorney Joseph Bartlett in his book, Fundamentals of
For that reason, bankers worry that selective release also
hurts stockholders that are not released. If share prices
drop when there is selling pressure, wouldnt it also hurt
shareholders who cannot sell? asks a veteran banker who
has been through several boom and bust cycles and who spoke on
condition of anonymity. This is the dark side of the
lockup business. And the SEC, which can mandate disclosure and
require timely reporting, is doing little to help, the
Lockups have never been as secure as they are made out to
be. In soliciting business, many underwriters have routinely
promised some insiders usually white-shoe VCs and
founding superangels discretionary releases. Often it
was an inducement to get additional business. And because the
insider sales did not have to be reported until it was
complete, even the buyer of the stock would never know that the
seller was an insider.
It doesnt take much to correct the discretionary
release loophole. Two simple suggestions would be to require
all insiders to disclose their intent to sell, especially
within the lockup and immediately at the end of the lockup, and
to allow all insiders to sell within the lockup if underwriters
permit one to do so.
When President Obama signed the JOBS bill into law, one of
the goals was to promote capital formation with a minimum of
disclosure and regulation, but capital formation is a two-way
street. If you want to help companies raise capital, you also
need to protect investors that are offering up the capital.
Creating greater real-time transparency about trades,
especially during the lockup period could be a good start.