The IPO market looks to be warming back up as the level of companies filing to go public is nearing its highest since the 2008 recession. Now with Facebook (FB), one of the most followed IPOs of all time, the focus is squarely on new offerings. There are a lot of ways to make money from initial public offerings other than buying shares before it starts trading. Nearly every company seeks to protect the value of its IPO by having its existing shareholders bound by a "lockup" agreement. This prevents insiders and pre-IPO investors from selling their shares on the open market usually for a period of 90, 180 or 360 days. If an investor times it correctly he or she can make good money from shorting the IPO or hedge losses by selling stock or buying put options before the lockup period expires. While many pre-IPO investors and insiders do not sell their stock after the lockup period, often just the possibility of future sales is enough to drive the stock price down. Of course an investor must weigh the value of each stock individually, but here are three companies whose lockup periods are expiring imminently.
Mattress Firm Holding Corp. (MFRM) operates in the $11.6 billion highly fragmented mattress market. The company went public in mid-November of last year, pricing 5.5 million shares at $19 per share. Since its IPO the stock has steadily climbed to a high of over $45 per share in mid April. Now with the lockup expiration looming it has fallen to $36 and there may be more downside. On May 16, there is the possibility of 27,539,601 shares hitting the market. It is rare that all or even most of the shares that are freed up after the lockup expiration will be sold, but clearly the market is worried about it.
Intermolecular, Inc. (IMI) is a small company you made not have heard of. Intermolecular has a proprietary platform, which it uses to bring products of semiconductor and clean energy companies through research and development and into the market faster. The company went public November 18th of last year and offered 9.65 million shares. Included in that were 3.96 million shares from a selling stockholder. This IPO has not been a Wall Street darling and after pricing at $10 per share, it touched the $5 mark in early March. It has since rebounded to around $7 per share and slightly beat earnings estimates in late April. However, on May 16th 32,256,487 shares of the 42 million shares outstanding will become eligible for sale on the open market.
Digital Domain Media Group (DDMG) is the last company with a lockup period expiring soon. It does visual effects for motion pictures and commercials. Some of its credits include "Transformers," "Tron: Legacy" and "Thor." The company sold 4.92 million shares at $8.50 a share, last November. The stock closed the May 15 session at $7.47 per share. The lockup period expires on June 4, because the company reports earnings on May 16. The consensus estimate is for a loss of 0.41 cents. The 180-day lockup period applies to 34,580,993 shares out of about 42 million shares outstanding. Certain people in the company and the company itself also have options to convert notes into common stock and warrants that may be converted into common stock.
Update: Digital Domain Media Group (DDMG) reported earnings on May 16th that exceeded analysts' expectations. Revenue for the quarter was $4.6 million above estimates and net loss was 3 cents a share better than the consensus. The report of material news enacts a clause in the lockup agreement it has with its shareholders. If the company announces earnings in the 16-day period prior to the expiration of the lockup period, the restrictions of the lockup provision will continue for 18 days after the announcement. Therefore the lockup period now will expire on June 4th.
Most of the shares mentioned in this article are subject to certain requirements provided by SEC Rule 144 and 701. This means the stock must meet certain requirements before the shares can be sold. For instance, a restricted shareholder may not sell more than 1% of the average daily volume for the four weeks prior to registering the shares. In some cases an insider or pre-IPO shareholder must register the sale of the stock with Form 144, but this may occur suddenly and the shares may go on the market before retail investors have a chance to react. Watching what insiders are doing with company shares can be one of the best indications of where the company might be headed in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.