(Author's Note: This is an updated column that clarifies a case of the extension of a lock-up period's expiration date.)
These headlines - "As Lock-Up Expires, Groupon's Shares Plunge" and "Groupon shares drop as IPO lock-up ends" - ran on two major financial news services on Friday, June 1. Not to be outdone, more than a dozen others chimed in with their versions of the same story.
What made this story unusual was Groupon's (GRPN) lock-up expiration date had been extended to June 1 from May 2 after the company had restated its fourth-quarter and full-year earnings at the end of March, according to The Chicago Tribune.
And what was even more unusual was Groupon's violent selloff on its lock-up expiration.
Over the years, hundreds of IPOs have come to market and sailed past their lock-up dates unnoticed. Sometimes the stock would hit a pocket of selling and that would excite the media, but there was no evidence of insiders dumping their shares once the lock-up restrictions had expired.
Insiders have a better way to ease their shares into the market. It's called a follow-on offering.
The Power of Ye$
Each IPO has an escape clause in its "lock-up agreement" that lets insiders sell millions of their shares AHEAD of the lock-up expiration date.
Most of the wording of these lock-up agreements contains boilerplate language. They all tend to read the same. Let's visit Groupon's "Lock-up Agreements" in its prospectus:
In connection with this offering, officers, directors, employees and stockholders, who together hold substantially all of our outstanding stock, stock options and restricted stock units have agreed, subject to limited exceptions, not to directly or indirectly sell or dispose of any shares of our common stock or any securities convertible into or exchangeable or exercisable for shares of our common stock for a period of 180 days after the date of this prospectus (or such earlier date or dates as agreed between us and Morgan Stanley & Co. LLC), and in specific circumstances, up to an additional 34 days, without the prior written consent of Morgan Stanley & Co. LLC on behalf of the underwriters, or are otherwise subject to substantially similar contractual restrictions with us. For additional information, see "Underwriting."
Simply stated: Insiders can go back to the underwriters any time ahead of the expiration of the lock-up period for permission to sell their shares.
Realistically, what do you think the underwriters will say?
They'll be looking at another multimillion-dollar payday in underwriting fees and commissions. That kind of incentive makes it incredibly easy to say "yes."
It all harks back to Wall Street's basic philosophy, which is best summed up in three words: "Get the Money." (Graybeards on the Street like to say those are "the last three words in the Bible.")
Listed below are recent examples of IPO insiders front-running their lock-up periods:
On July 26, 2011, Dunkin priced its IPO of 22.5 million shares at $19 each. Its 180-day lock-up period expired on Jan. 22, 2012. (Underwriters collected $27.5 million in fees and commissions.)
On Nov. 16, Dunkin priced a follow-on offering of 22 million shares at $25.62 each. Selling shareholders offered all the shares. (Underwriters collected $19.7 million in fees and commissions.)
On Jan. 24, 2012, Guidewire priced its IPO of 8.9 million shares at $13 each. Its 180-day lock-up period expires on July 21, 2012. (Underwriters collected $8.1 million in fees and commissions.)
On April 19, Guidewire Software priced a follow-on offering of 8 million shares at $28.25 each. Selling shareholders offered 7.3 million shares. (Underwriters collected $9 million in fees and commissions.)
On Dec. 14, 2011, Michael Kors priced 47.2 million shares at $20 each. Its 180-day lock-up period expires on June 11, 2012. (Underwriters collected $47.2 million in fees and commissions.)
On March 22, Michael Kors priced a follow-on offering of 25 million shares at $28.25 each. Selling shareholders offered all 25 million shares. (Underwriters collected $35.3 million in fees and commissions.)
Conclusion: Insiders don't have to wait for the lock-up period's expiration to roll around to jettison stock. It's this simple: Pick up the phone, call the underwriter and ask "permission" to float a follow-on offering.
At press time, this week's IPO calendar remains "clean and green." That doesn't necessarily mean that July will be a boring month on the IPO front.
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.