In the classic children’s story, Chicken Little runs down the road shrieking, “The sky is falling!” A casual reading of the financial press about the sliding prices of recent IPOs might make some wonder whether Chicken Little had taken up journalism.
It’s true. Some IPOs are selling off ahead of the expiration dates of their 180-day lockup periods. But the sky is not falling.
There is a clause in every IPO’s prospectus in which insiders agree not to sell any of their stock for a period of 180 days after the IPO is priced.
Once the lockup period expires, insiders are free to dump tens of millions of shares into the marketplace much like water cascading over Niagara Falls and thundering onto the rocks below — or so some in the financial media would have you believe. There are no facts to support this hypothesis.
For that matter, the 180-day lockup period is totally irrelevant. Yes, irrelevant.
The 180-day lockup agreement reads like this:
“We and all of our directors and officers and substantially all of our stockholders and option holders have agreed not to offer, sell or agree to sell, directly or indirectly, any shares of common stock without the permission of the underwriters for a period of 180 days from the date of this prospectus.”
(Source: Angie’s List’s prospectus)
Note this condition: “Without the permission of the underwriters”
Now for reality, Wall Street-style: What underwriter would turn down an opportunity to launch a follow-on offering and collect another multimillion-dollar round in underwriting fees?
Over the past several weeks, there have been examples of insiders unloading millions of shares ahead of the 180-day lockup period’s expiration date. That’s right – ahead of the 180-day lockup period’s expiration date. Consider:
Bankrate (RATE)
* On June 17, 2011, Bankrate priced its IPO.
* On Dec. 14, its 180-day lockup period expires.
* On Nov. 23 – five-plus months after going public – the company filed for a follow-on offering to sell 10.5 million shares. Insiders are offering all the shares.
Dunkin Brands Group (DNKN)
* On July 27, Dunkin Brands priced its IPO.
* On Jan. 23, 2012, its 180-day lockup period expires.
* On Nov. 1 – three-plus months after going public – the company filed for a follow-on offering to sell 22 million shares. Insiders were offering all the shares.
* On Nov. 16, the follow-on offering was priced.
* Note: Its underwriters pocketed $19.7 million in underwriting fees.
Fusion-io (FIO)
* On June 9, Fusion-io priced its IPO.
* On Dec. 6, its 180-day lockup period expires.
* On Nov. 9 – five months after going public – the company filed for a follow-on offering.
* On Nov. 21, Fusion-io priced its follow-on offering of 8.8 million shares. Of those, insiders sold 5.8 million shares.
* Note: Its underwriters pocketed $11.7 million in underwriting fees.
LinkedIn (LNKD)
* On May 19, LinkedIn priced its IPO.
* On Nov. 15, the 180-day lockup period expired.
* On Nov. 3 – five-plus months after going public – the company filed for a follow-on offering.
* On Nov. 16, LinkedIn priced its follow-on offering of 8.75 million shares. Of those, insiders sold 7.48 million shares. This is in addition to insiders having sold 3 million shares in LinkedIn’s IPO in May.
* Note: Its underwriters pocketed $18 million in underwriting fees.
Fast forward to Monday, Nov. 21: LinkedIn closed at $70, DOWN from $71, its offering price, and the headlines unleashed a Chicken Little moment, blaring that LinkedIn’s insiders were dumping stock – driving the price down to an intraday low at $66 per share – “As Lockup Period Expires”
Hey, Guys! The lockup period expired nearly a week earlier and insiders had already sold over 10 million shares.
Oh, and what about the stock market?
Since Friday, Nov. 11, the stock market has been in a freefall. In just two weeks, the three major U.S. stock indexes have each tumbled somewhere between 7.6 percent and 8.6 percent.
Give me a break.
Now back to our story. What happened to Chicken Little? After she rounded up all her friends, the evil Foxy Loxy lured them into his den. They wound up as his dinner.
The moral of the story: Chicken Little did not get all the facts before shooting off her mouth. That turned out to be a costly mistake – for her and her friends.
Disclosure: Neither the author nor anyone else on the IPOScoop.com staff has a position in any stocks mentioned, nor do they trade or invest in IPOs. The author and IPOScoop.com staff do not issue advice, recommendations or opinions.
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