Facebook Could Face Wave of Selling in 3 Months

Tony Avelar | Bloomberg | Getty Images

Typically, insiders and major holders in a company that has just gone public have to wait 180 days to sell their shares.

But in an atypical move, Facebook tweaked the so-called lock-up period to allow for a large amount of additional shares to be sold just three months from now.

“Facebook has an unusually short lock-up period with the free float now expected to increase by 55 percent after just 91 days (equates to $10 billion worth of stock at high-end of current IPO range),” cautioned Rich Greenfield, an analyst with BTIG, in a note to clients Thursday.

To boot, even more shares can be unlocked 151 days from now, according to the amended Facebook filing from Wednesday. This frees up enough stock so that the float—or number of shares openly traded—will more than double “before the traditional 180 lock-up period expires,” said Greenfield.

Lock-up periods are put in place so a single holder can’t cash in all their stock right away, sending volatility soaring and the shares of a new listing downward.

When lock-up periods do end, the increased supply of shares hitting the market typically weighs on the stock. For Facebook, this difficult time will come earlier and with double the supply of the initial offering.

“This sounds to me like the Facebook investors are scrambling over each other, yelling, ‘get me out!’ said Enis Taner, global macro editor at RiskReversal.com. “Meanwhile, the Muppets buy.”

However, this potentially weak period for the stock could be a buying opportunity, some investors said.

“The way to play Facebook I think is to look at LinkedIn,” said Josh Brown, author of The Reformed Broker blog and a financial advisor at Fusion Analytics. “It will have a big opening week, then you’ll have plenty of time to add on during the lockup, then it will hit new all-time highs again.”

Shares of LinkedIn the employment social network traded to a new high a couple months after its May 19 IPO last year, but the stock began to tank before and immediately after its lock-up period expired 180 days later on Nov. 19th. LinkedIn hit an all -time low of $59 ten days after that lock-up expiration before rallying back to above $108 this week.

But that was a traditional calendar for a new stock. Facebook is testing uncharted waters with this shorter lock-up and larger share offering.

“They’ve had some infighting over people wanting to sell so its sounds like they moved up the lock up so those people could get out,” speculated Stephen Weiss of Short Hills Capital.

Facebook may also be increasing the number of shares out there faster so that the stock can go into major indices – and the exchange-traded funds that track them — earlier than usual, traders said.

The Nasdaq-100 Index could add Facebook sooner if more shares are available for trading. The buying by index managers could help offset the monster selling by insiders.


NEW SLIDESHOW: The Facebook IPO: A Fast Money Primer


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