Tilray's Stock Lockup

Friends, a note about public stock.  Tilray (which you may have heard of) announced that its largest shareholder, Privateer, which owns about 76%(!) of Tilray’s stock, won’t immediately sell when Privateer’s lockup expires next week.  (link)

(If you know what this means, skip this next paragraph)

When a company goes public, its stock is “registered”, which basically means that shares may be freely sold to other investors without restriction (it’s what allows me to go on e-Trade and buy shares of Bigfoot Project Investments (OTC:BGFT)*).  To be registered, a company needs to do things like file information publicly (BGFT's filings).  When a private company IPOs, its larger shareholders and management are customarily “locked up” from selling by the underwriters (the bankers paid handsomely for the risk of selling the IPO shares to brokers) for a period of time (180-360 days), so that the buying public (brokers) has confidence that the major ownership and management teams aren’t cashing out on day one.**  So when that lockup expires, those shares may then be registered and also sold to the public***.  The market’s concern is that a huge pile of stock will then flood the market and depress the stock price (supply>demand).  On the other hand, it means that there’s a lot more stock to go around for trading, getting rid of the dreaded “overhang”, so in the longer term, it’s a generally good thing for the markets and liquidity.  TLDR: lockups release more stock for trading.

When a single shareholder owns 76% of the stock of a publicly-traded company, that’s a really large overhang on the float (which also causes expensive short borrows (link; see also my blog!))  Plus, the single shareholder entity here is headed up by the CEO of the issuer.  So, when Privateer announced that it wouldn’t flood the market to quadruple the number of shares freely traded, the markets responded by bidding up the stock price (and squeezing the shorts even further). 

I’m guessing the main reason for this decision is that it’s just not that easy to sell that much stock without annihilating the stock price.  Shares can be sold as “block trades” in large chunks to big investors, but those are negotiated deals and take time to execute and there aren’t as many institutional investors (e.g., mutual funds, pensions) that will want to take large bites of a highly-volatile stock (more likely hedge funds).  There can be a “secondary offering” through an underwriter, but that’s expensive and underwriters take a cut.  Or they can sell the shares over (a very long) time.  This requires small trades over a long period, which are hard to keep quiet, but help maintain the stock price.  In the meantime, there are ways for the owners to get some liquidity – say, borrowing from a bank against those shares, or lending them out to short sellers (which, yes, is weird for a management owner to do, and some issuers don’t let their management/board do this).

So, this move is good for prices, but also a mixed blessing for the markets.

Excelsior!****

*This is a real company, and it’s amazing (not investment advice).

*At times, they sell some shares into the IPO, but that’s still typically limited.

***I’m skipping some steps to keep this from getting too boring.

****I’ve gotten a few comments about this signoff.  I stole it from Longfellow’s Excelsior.  Stan Lee apparently did too.

Written by: Marc Hauser