When most companies go public, they follow a simple rule: insiders cannot sell stock for 180 days after the IPO. SpaceX is taking an unusual approach that could allow pre-IPO investors to sell faster.
The company has built in a series of release valves that allow insiders to sell some of their stock in the weeks and months following the IPO. This step-by-step approach to insider selling accomplishes several things. This avoids potential pressure on the stock if the lockup were to be lifted and everyone could sell at the same time. And perhaps even more noteworthy, the free float, or tradable shares, could increase faster, which could impact a quicker listing on the Nasdaq 100.
Here’s how SpaceX configured the lockup, according to S-1’s entry: Insiders can sell up to 20% of their eligible lockup shares after the company reports earnings for the three months ending in June (its first financial results as a public company). You can sell an additional 10% if this stock also trades at least 30% above its IPO price at that time.
Additionally, there is a rolling schedule consisting of 70, 90, 105, 120, and 135 days post-IPO, with each interview unlocking an additional 7%. Additionally, an additional 28% could be sold in the three months ending in September as SpaceX reports its second earnings as a public company. After 180 days, anything remaining will be fully released.
Incorporating an index
This unique lock-up structure appears to be a response to Nasdaq’s new rules that include a “fast entry” for companies newly listed on the Nasdaq 100. As of May 1, any company with a market capitalization greater than the top 40 companies on the Nasdaq 100 (SpaceX would qualify based on projected valuations) would be eligible to list a few weeks after its IPO. Nasdaq changed its minimum float requirement of 10%, but until more shares were available for trading, companies were given less weight in the index.
That’s why SpaceX, which is likely to go public with a very small float, has an incentive to go public soon thereafter. Inclusion in the Nasdaq 100 could trigger a wave of forced buyers from index funds and institutional investors looking to match the benchmark. The greater the weight, the greater the tailwind for inclusion in the index.
This also has the potential to offset inventory pressures resulting from the overhang of the typically 180-day lockup expiration date. Once the lockup ends, the supply of tradable stocks could increase overnight. Even if only some insiders sell, anticipation for that day will weigh on the stock price in the weeks leading up to that day.
Founder Elon Musk will remain in custody and will not be allowed to participate in the early release clause, the filing said. Initial filings suggest that only SpaceX will sell stock in the IPO, and none of the insiders intend to pitch in the initial public offering itself.
