SpaceX Lockup Period: What You Need to Know About Potential Sales by Longtime Shareholders

SpaceX hasn't even launched its historic initial public offering, and we're already talking about selling the shares? Well, it's important to remember that certain investors have backed the SpaceX story for quite some time in the private market, and though they may still strongly believe in the company's future, some of them may want to lock in some gains too. For example, Ark Invest's Ark Venture Fund has seen the company's valuation climb from $350 billion just two years ago to possibly $1.7 trillion post-IPO.

We don't know the specific plans of Ark Venture, but it wouldn't be surprising if early investors in the company sold some shares in the near future to benefit from SpaceX's incredible gain. Here's an important point, though: They can't do it right away. Lockup periods are put into place around IPO stocks, preventing early investors from selling immediately after the operation. SpaceX is on track to launch its IPO on June 12.

Let's zoom in on SpaceX's lockup period to find out the details and how this may impact stock performance.

Image source: Getty Images.

Why set up a lockup period?

So, first of all, a quick note about why companies establish lockup dates. The answer is simple: Imagine what would happen if every big early investor in SpaceX in the private market were able to sell some shares on IPO day. If the stock soared right out of the gate, these investors might rush to take advantage of that and sell at least a small portion of their holdings.

This could put significant downward pressure on the stock on its first day of trading and in the days to follow -- and that wouldn't be fair to newer investors who participated in the IPO or those who bought in the early hours of trading on IPO day. It would also represent a rocky start for the company and even potentially discourage investors from buying the shares.

To avoid those possible troubles, companies set up lockup periods -- during this time, early investors aren't allowed to sell their shares. These periods apply to insiders and early investors and generally run for 90 days to 180 days after the IPO. SpaceX has taken a slightly different approach, creating a tiered lockup schedule. The idea is that this creates a gradual flow of selling on the market, rather than a huge number of shares hitting the market at once.

The SpaceX lockup details

Here are the lockup specifics, according to the company's prospectus:

• Early investors may sell as much as 20% of their holdings as of the second full day of trading after the next earnings report. This is the second-quarter report.
• At that point, investors may sell an extra 10% if the stock trades 30% higher than its IPO price for a minimum of five of the 10 days following the earnings report.
• Investors may sell 7% of their holding at each of the following points: As of the 70, 90, 105, 120, and 135 days post-IPO.
• Investors may sell 28% of their shares as of the second full trading day after SpaceX's third-quarter earnings report.
• Finally, investors may sell as they wish after 180 days.

What about the biggest investors of all? Those would be Elon Musk and unnamed investors, mentioned as "certain significant investors" in the SpaceX prospectus. They agreed to hold onto their shares for at least 366 days.

SpaceX's tiered lockup technique should offer the stock price more stability than a traditional lockup schedule, but it may not create a completely smooth path for the stock. So, if you're a SpaceX investor or potential investor, you might want to mark your calendar for these moments -- even in the days ahead of these dates, the stock could face some selling pressure. But this isn't necessarily a bad thing. In fact, any declines may create opportunity if you're interested in getting in on SpaceX stock or adding to your holding.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.