{"text":[[{"start":6.82,"text":"Six weeks ago, SpaceX floated five per cent of the company in the largest ever initial public offering. The offering raised $86.25bn to fund future investment and pay down debt. None of the existing shareholders sold any stock."}],[{"start":19.92,"text":"But the flotation left most of the company still in private hands. Despite sustained price falls from the initial post-IPO sugar stock price high, pre-IPO investors still sit on massive gains. And they are subject to a lock-up schedule very different from what is typically applied in IPOs, the first of which expires on Thursday and is set to more than double the amount of SpaceX stock free for sale."}],[{"start":48.28,"text":"The question is whether SpaceX’s lock-up — itself arguably modelled on May’s IPO of AI chipmaker Cerebras — will smooth out the flow of new stock into the market or just weigh on the stock price for an extended period."}],[{"start":61.36,"text":"In a normal IPO, directors, officers, and significant pre-IPO shareholders are subject to a 180-day lock-up. The lock-up is drafted broadly to prohibit not only outright stock sales but also a broad array of monetisation strategies, such as hedging, equity swaps, collars, pledges and other derivatives designed to replicate the economics of a sale. Lock-ups are contractual; there is no regulatory requirement."}],[{"start":87.64,"text":"SpaceX and its IPO underwriters agreed on a custom-built structure that departs from the standard 180-day lock-up for insiders. Instead of a cliff-edge release when all or a large portion of restricted stock becomes freely saleable, the company and its advisers adopted a staggered release schedule aimed at feeding new shares into the market gradually."}],[{"start":107.4,"text":"The first tranche (20 per cent of the total stock to be released over the first 180 days) becomes saleable two days after the company’s first earnings release, scheduled Tuesday. This is followed by a series of scheduled unlocks over subsequent months. A substantial amount (28 per cent) releases after SpaceX reports its third-quarter financials, while Elon Musk and “certain significant investors” remain locked up a full year."}],[{"start":null,"text":"
"}],[{"start":132.68,"text":"At one level, you can understand the logic. A single cliff-edge lock-up expiry could result in a massive block of stock hitting the market. The concern is that the share price could weaken in the run-up to the release or even that such a large sale would wallop the share price. By “metering” the stock sales, SpaceX and its underwriters hope that the market can more easily absorb the smaller blocks, while still allowing early investors the opportunity to monetise earlier than would normally be the case."}],[{"start":162.36,"text":"Sounds sensible, but does smoothing supply equate to an orderly market? At least with a single lock-up expiry, investors know the date and it’s, in effect, a one-off. They can brace for the impact, and then the overhang disappears and the stock can continue afterwards. A conventional lock-up is akin to ripping off a Band-Aid in one go: it hurts like hell for a moment, and then it’s over. A staggered release is more like peeling off the bandage slowly. Less painful on the day but the agony lingers. As soon as one tranche clears, investors face the prospect of more stock in a few weeks’ time."}],[{"start":198.24,"text":"In any case, there’s scant evidence that the structure has reassured investors. According to Bloomberg, short interest has soared to an eye-watering 34 per cent of the total float in the run-up to the first lock-up release on 6 August, and the stock has fallen to around $108 at pixel time — less than half the all-time high stock price achieved just six weeks ago."}],[{"start":219.44,"text":"The Cerebras IPO lock-up is instructive. There the lock-up was divided into multiple release dates after earnings announcements, on specified dates and upon meeting stock price performance triggers. Whatever remained locked up was released by the earlier of the third-quarter financials release or the 180-day period. As with SpaceX, the stock has come under pressure as it approached its first major lock-up release."}],[{"start":243.2,"text":"It’s important to recognise that it’s impossible to prove that the staggered structure explains the share price weakness of either stock. Many other factors have affected their performance, including the lofty valuations that make their stock price inevitably vulnerable to a correction. Nevertheless, there’s at least a correlation that’s difficult to ignore."}],[{"start":262.4,"text":"Part of the problem is that nobody knows how much of this overhang is real. Some pre-IPO holders may have sold out before the flotation in one of the liquid platforms for private stake sales. Others may have discreetly used separate vehicles to hedge their positions. And many of them are sitting on such large gains that they can lock in a windfall by selling only a portion and keep the remainder to ride the option value of investing alongside Elon Musk. The challenge is that from the outside it’s impossible to know how much of this has happened. The structure and scale of the potential overhang is known, but the behavioural response remains elusive over a prolonged period."}],[{"start":305.54,"text":"Of course, there’s a way of allowing insiders to sell whilst still aligning their interests with public market buyers, and SpaceX has partially adopted it by tying one of the releases to performance: an additional slice unlocks early only if the stock trades 30 per cent above its IPO price. That is the right instinct by rewarding insiders for public market appreciation, rather than letting them cash out regardless of how the IPO has performed. Extending that logic, one idea might be to condition a significant amount of lock-up releases within the first year on the stock trading above issue price."}],[{"start":341.92,"text":"Underwriters may recommend longer or stricter lock-ups, but founders and early investors sitting on humongous paper gains usually demand earlier liquidity. In a carnivorously competitive underwriting market, a rival is often willing to offer more flexibility."}],[{"start":357.36,"text":"With the staggered release schedule, SpaceX and its underwriters have tried to ensure an orderly market. But they may have replaced one sharp adjustment with a persistent overhang. The lock-up structure risks damaging market price discovery and — ironically — harming the very shareholders it was designed to help."}],[{"start":357.86,"text":"Further reading:"}],[{"start":378,"text":"— Alphaville LLC initiates coverage of SpaceX with Buy recommendation (FTAV)"}],[{"start":383.92,"text":"— SpaceX and the myth of independent Wall St research (MainFT)"}],[{"start":391.37,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1785824002_4315.mp3"}