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Written by Sean Williams for The Motley Fool
Space Exploration Technologies (SpaceX) reset the bar for initial public offerings (IPOs) on Wall Street.
SpaceX just reached its next milestone, unlocking approximately 319 million insider shares for sale.
The company’s ongoing share-unlock events and historically low post-IPO float are triggering a wealth transfer from retail investors to corporate insiders.
On June 12, Elon Musk's artificial intelligence (AI) and space infrastructure goliath, Space Exploration Technologies (better known as SpaceX) (NASDAQ:SPCX), reset the bar for initial public offerings (IPOs). The $85.7 billion raised from its IPO, including the underwriters' overallotment, almost tripled the previous record holder, Saudi Aramco.
Retail investors are clearly excited about SpaceX's high-ceiling addressable opportunity. The company's lengthy prospectus suggests that $26.5 trillion of its $28.5 trillion addressable market lies with AI.
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
But SpaceX is making dubious history as well. The company's nontraditional lockup period and historically low post-IPO float have set retail investors up for a potential fleecing.
When private companies go public, they'll usually prevent insiders, comprised of high-ranking executives, board members, and early investors, from selling their shares for 180 calendar days. This lockup period prevents insiders from taking advantage of early investor hype.
SpaceX's mile-long registration statement outlined a different approach that would allow early-release-eligible insiders to sell some of their shares well before the 180-calendar-day mark. Although Elon Musk isn't eligible to sell any of his shares for 366 calendar days, a slew of event- and time-based share-unlock periods were put in place.
Great look at the SpaceX shares unlock schedule as well as the potential passive buying schedule from @JSeyff @FrancisSharoon Depending on the early post-IPO returns, this could really play with and disperse the returns of "passive" funds (which is why there's arguably no such… pic.twitter.com/KOuEkJlngF
The first early-release-eligible share-unlock event occurred two days after the company's first quarterly report as a public company. On Aug. 6, approximately 911.5 million shares (roughly $100 billion in market value) became eligible for sale.
Several time-based events follow, with early-release-eligible shares unlocking on calendar days 70, 90, 105, 120, 135, and 180 after SpaceX's debut. Thus far, 319 million additional shares became eligible for sale by select insiders on Aug. 20 (the 70th calendar day) and Sept. 9 (the 90th calendar day).
Today, Sept. 24, marks the 105th calendar day and, therefore, the release of another 319 million shares for eligible insiders, equating to approximately $48.7 billion in potential selling pressure.
However, the potential for persistent insider selling is only half the story. The fleecing of SpaceX's retail investors also has to do with the company's low post-IPO float (the number of tradable shares).
When a company goes public, it typically sells 10% to 25% of its outstanding shares. Even though Musk's Space Exploration Technologies sold around 555.6 million shares at $135 each for its IPO, which may sound like a lot, this represented less than 5% of its outstanding shares.
Initially, SpaceX's low float worked in its and its shareholders' favor. Being granted fast-track entry into the Nasdaq-100, Russell 1000, and Russell 3000 meant passive funds would be purchasing its shares.
But with each successive share-unlock milestone, the company's float meaningfully grows. What we're witnessing is, arguably, nothing short of the greatest wealth transfer in history, from retail investors to corporate insiders who've not had an avenue to sell for years, if not over a decade.
All the while, SpaceX is losing money and spending aggressively on its AI infrastructure expansion. While growth rates are robust, Musk's AI and space conglomerate hasn't yet proven its long-term sustainability.
Today marks one of several milestones where SpaceX's retail investors are getting the short end of the stick.
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Sean Williams 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.