When most companies go public, they follow a simple rule: insiders can’t sell their shares for 180 days after the IPO. SpaceX is taking an unusual approach that could allow pre-IPO investors to sell sooner.
The company built in a series of release valves that allow insiders to sell portions of their stock in the weeks and months after the IPO. This phased approach to insider selling accomplishes a few things. It prevents potential pressure on the stock when a lock-up is lifted and everyone can sell at once. And perhaps, even more noteworthy: It also could increase the float – or shares available to trade – sooner, which has implications for faster inclusion in the Nasdaq 100.
Here’s how SpaceX structured its lock-ups, according to the S-1 filling. After reporting earnings for the three months through June – the company’s first results as a public company – insiders can sell up to 20% of their eligible locked-up shares. If this stock is also trading at least 30% above the IPO price at that point, they can sell an additional 10%.
Then there’s a rolling schedule, comprising 70, 90, 105, 120 and 135 days post-IPO, where another 7% unlocks at each of those interviews. Additionally, when SpaceX reports its second earnings as a public company – for the three months through September – an additional 28% can be sold. At the 180-day mark, whatever remains would be fully released.
Index inclusion
The unique lock-up structure is likely a response to new Nasdaq rules to include “fast entry” for new listings to be included on the Nasdaq 100. As of May 1, companies with market caps above the 40 largest members in the Nasdaq 100 – SpaceX, based on its expected valuation, would qualify – are eligible for inclusion several weeks after their IPO. While the Nasdaq changed the 10 percent minimum free float requirement, it does give companies a lower weighting in the index until they have more shares available for trading.
That’s why SpaceX, which is likely to go public with a very small float, has an incentive to ramp soon after. Inclusion in the Nasdaq 100 can trigger a wave of forced buyers from index funds and institutional investors who need to match their benchmarks. The greater the weighting, the greater the index-inclusion tailwind.
That could also counterbalance the stock pressure that typically stems from a 180-day lock-up expiration overhang. When lock-ups end, the supply of tradeable shares can increase overnight. Even if only a fraction of insiders sell, the anticipation of that date weighs on the stock in the weeks before it arrives.
Founder Elon Musk would remain locked up and is not allowed to participate in any of the early-release provisions, the filing said. The first filing implies that only SpaceX will be selling shares in the IPO – none of the insiders intend to sell into the offering itself.
