The Truth About the Tesla “Lockup” Expiration

I was short a little bit of Tesla ($TSLA: no positions) recently, and after I covered my short this morning, a colleague mentioned to me that he saw something about a lockup expiration tomorrow, related to the Tesla’s May secondary offering.    The “news” stems from a writeup on Benzinga which claimed:

“Tesla’s rally was supported by a strong equity offering back in May, when the company sold 3.9 million shares at $92.24 in a secondary offering with visionary CEO Elon Musk buying an 1,084,129 shares valued at just over $100 million from the sale.

However, on Thursday, August 15, Tesla’s lock-up period expires, meaning large investors who piled into the stock at $92.24 at the offering could look to book profits. For the first time since May, these insiders could look to sell shares and at current prices, they would be happy to book an approximate 56 percent gain over just three months.

Assuming Elon Musk refuses to sell any shares come Thursday, there could still be a flood of about 2.9 million shares, or about 2.4 percent of the floating shares, sold. On average, 10.69 million shares of Tesla trade per day, meaning that up 27.1 percent of the average daily volume could be for sale. This could severely weigh on prices, at least in the short-term, and potentially cause a wave of selling from traders who are levered long.”

This immediately sounded strange to my colleague (and to me), as it’s unusual for shares bought in a secondary offering to be subject to lockup restrictions.   The lockup usually puts restrictions on the sellers from selling more shares within a certain time period, or restricts large insiders.   So I went directly to the SEC filing for the May underwriting agreement for Tesla, and found this, emphasis mine:

5. The Company agrees with the Underwriter:

(g) During the period beginning from the date hereof and continuing to and including the date 90 days after the date of the Prospectus (the “Lock-Up Period”), not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose, except as provided hereunder, of any securities of the Company that are substantially similar to the Shares, including but not limited to any options or warrants to purchase shares of Stock or any securities that are convertible into or exchangeable for, or that represent the right to receive, Stock or any such substantially similar securities (other than (i) the issuance and sale of the Stock to be sold pursuant to this Agreement, (ii) pursuant to employee equity incentive plans existing on the date of this Agreement, (iii) upon the exercise of an option or upon the exercise, conversion or exchange of exercisable, convertible or exchangeable securities outstanding as of the date of this Agreement, (iv) the issuance of Stock in connection with mergers or acquisitions of securities, businesses, property or other assets, joint ventures, strategic alliances, equipment leasing arrangements or debt financing up to an aggregate of 5% of the sum of the Company’s fully-diluted shares outstanding as of the date of the Prospectus plus the Shares, (v) the notes issued in the concurrent registered public offering of Convertible Senior Notes due 2018 pursuant to the Prospectus Supplement of the Company dated May 16, 2013 and the shares of Stock issuable upon conversion of such notes) and (vi) the entry into, or the issuance by the Company of any shares of Stock upon settlement or termination of the warrant transactions evidenced by the warrant confirmations, each dated the date hereof, and any additional warrant confirmations, each to be dated the date of issuance of Optional Securities (as defined in the Underwriting Agreement, dated as of the date hereof, by and among the Company and the underwriters named in Schedule I thereto, relating to the 1.50% Convertible Senior Notes due 2018 of the Company), without the prior written consent of Goldman, Sachs & Co

Later, we also see:

8 (j): “The Company shall have obtained and delivered to the Underwriter executed copies of an agreement from each of Elon Musk and Elon Musk Revocable Trust dated July 22, 2003, substantially to the effect set forth in Section 5(g) hereof in form and substance satisfactory to you;

5(g) is the part I excerpted just above which describes the lock-up provisions.

Now, I am not a lawyer.   I *hate* reading and parsing financial legal language.   That said, I’m pretty damn sure that what it says above is that the lockup applies to Tesla (“The Company”) selling more shares during the 90 day period following the offering, and that they can even do so with some restrictions.   Section 8(j) also tells us that Elon Musk and his Trust were also subject to the lock-up provisions.

I have no idea where Benzinga got the non-fact that those who bought on the May secondary offering will have their first chance to sell shares tomorrow with the expiration of a lock-up which they were never subjected to in the first place.

I wonder how many people shorted $TSLA in false-anticipation of this non-lockup expiration.  The article was the 4th most read article on Benzinga yesterday.

benzinga_tsla

Benzinga: Is the Coming Tesla Lockup Expiration a Signal To Sell Tesla?

Tesla’s May Secondary Underwriting Agreement SEC Filing

-KD

disclosure: I have no positions in $TSLA at the time of this writing.  I believe that the stock is expensive, but it’s been expensive for a while.   I have traded TSLA from the short side multiple times this year, and I may do so again.

 

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