SpaceX's Massive IPO Won't Have the Typical Lockup Period. Here's Why.

Leave it to Elon Musk to find a way to do things differently.

The famed CEO is preparing to take SpaceX public in an offering that surely will be well north of $1 trillion. But he’s doing so in a way that is markedly different from other IPOs. And the result could create even more demand for SpaceX stock after the company files its first earnings report as a publicly traded entity.

Let’s look at the unusual -- but not unprecedented -- plan for the upcoming SpaceX IPO.

Why is the SpaceX IPO such a big deal?

SpaceX is arguably one of the top private companies operating in outer space, having conducted hundreds of missions, including transporting astronauts to the International Space Station and employing reusable rockets.

Earlier this year, SpaceX acquired another Musk company, xAI, putting Musk’s AI aspirations, the rocket company, and SpaceX’s Starlink satellite internet network under one umbrella. At the time, Musk said that he would “create the most ambitious, vertically integrated innovation engine on (and off) Earth, with AI, rockets, and space-based internet.”

That merger was valued at $1.25 trillion when it closed in February, with SpaceX valued at $1 trillion and xAI at $250 billion.

SpaceX is now targeting an IPO in June, with a value of at least $1.8 trillion. That would make SpaceX larger than Tesla, which is also owned by Musk. SpaceX would rank in the top 10 of publicly traded companies in the world by market cap.

Image source: Getty Images.

The unusual lockup period

When a company has an initial public offering, major shareholders, such as company insiders and early investors, are prohibited from selling their shares for a set period -- typically 180 days. This lockup period is designed to prevent insiders from artificially crashing the stock price, particularly if the stock price rises dramatically in the first few days after going public. In short, the idea is to allow the market to establish supply and demand, rather than institutional investors.

However, SpaceX is doing things differently. According to the company’s prospectus, SpaceX will allow investors to sell 20% of their stock on the second day of trading after the company’s first earnings report as a publicly traded firm -- in this case, its Q2 earnings report. Investors can sell another 10% of shares if the stock is 30% above the IPO price for at least five of the first 10 trading days after the earnings report.

There are other benchmarks built in as well -- at 70, 90, 105, 120, and 135 days after the IPO. Another 7% of SpaceX shares unlock at each of those points. Musk himself is not allowed to participate in any of the early-release provisions.

How does this help SpaceX stock?

There are a couple of benefits here. When the lockup expires in a typical IPO, a large number of shares can suddenly flood the market, leading to a marked drop in the stock price. With a staggered release of SpaceX shares, Musk and his team can eliminate that problem -- especially if the stock proves as popular as many believe it will.

Secondly, the program should increase the number of shares available to trade -- what’s known as the stock’s float. That’s important because Nasdaq recently changed its “fast entry” rule for new listings of large companies to be included in the market-cap-weighted Nasdaq-100.

SpaceX shares will quickly carry one of the highest weights in the index, which means index fund buyers will have to acquire SpaceX stock. That will push the stock price even higher.

But if companies have a small float, Nasdaq will give them a lesser weighting in the index. Therefore, SpaceX has an incentive to make shares available and increase its weighting.

In all, the SpaceX lockup period will differ from what many investors are used to. But there are distinct advantages that should make more shares available while preventing an influx that would push the stock price off a cliff. If the program is successful, it could change the way large tech IPOs -- and there will be several more to come this year -- are structured.

Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.