Lock up expiration, a safety net designed by the SEC, which prohibits certain class of shares from being sold on the open market until a fixed date from the debut, has been a hot topic recently. Many investors are citing it as a major factor for the more than 47 percent fall in Facebook Inc (NASDAQ:FB)’s stock prices since its IPO in mid May.
It’s not only Facebook Inc (NASDAQ:FB), but other social media stocks like Zynga Inc (NASDAQ:ZNGA) and Groupon Inc (NASDAAQ:GRPN), who are also trading at a fraction of their original valuations, who have also been troubled by the same fear of lockup expirations.
These concerns, apart from discouraging current investors, also dispirit investors to participate in the future social networking IPOs.
“I would caution investors in the future to look carefully at early lockups,” Scott Sweet of IPO Boutique, said in an interview. “It reeks of danger. And I think we’ve seen this danger several-fold here.”
Morningstar analyst James Krapfel said, “I think investors will take a much closer eye to any future social networking IPOs, in light of what has transpired at Groupon, Zynga, and Facebook.”
Coming months could bring in more bad news for the social networking giant, as 1.3+ billion shares are expected to hit the market before the end of the year.
According to an analysis from Citigroup, with Thursday’s lockup expiration, the size of Facebook Inc (NASDAQ:FB)’s float, or the numbers of shares available for trading, increased by 42 percent. So, on the same logic, when a much bigger November lock-up expires, the amount of shares available for trading will jump nearly 280 percent.
“It is a major concern,” Sweet, of IPO Boutique said. “If the amount was a small percentage — which in this case it’s not — it wouldn’t matter…. What’s considered an overhang is that investors know that more shares are coming, and the company needs a major catalyst to offset that negative influx that’s forthcoming.”
The company’s market capitalization, which was more than $100 billion at the time of listing, slumped to $43 billion on Thursday, with share prices falling to a record low of less than $20.
Morningstar’s Krapfel said, “there is a good chance lockup expirations in three and six months from now, will lead to similar sell offs, as most shareholders have a cost basis that is well below the current Facebook stock price, despite the nearly 50% sell off since its IPO.”