- Palantir Technologies is reportedly adding a lockup period to its direct listing, limiting investors’ ability to sell shares immediately after the company starts trading.
- Through the plan, investors could sell about 20% of their shares immediately.
- Spotify and Slack, the two companies that paved the way for direct listings, didn’t have such a lockup period.
- The lockup plan could limit insider trading, address investor expectations, and limit volatility, public offering experts said.
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Palantir Technologies is planning to go public via a direct listing, the same method pioneered by Slack and Spotify, but it may do so with a twist that could help shore up confidence in the money-losing tech company.
Palantir plans to adopt a so-called lockup provision in which its current investors will be able to sell up to 20% of their holdings in the direct listing, but would be barred from selling additional shares for 180 days, according to reports in The New York Times, The Information, and Tech Crunch.
The lock-up provision left some observers scratching their heads. Lockup periods are common in traditional IPOs. But neither Slack nor Spotify — the only two companies that have thus far used the direct listing method to go public in the US — included one in their offerings.
Unlike its two direct listing predecessors though, Palantir will enter the public markets amid great political and economic uncertainty if, as expected, its goes public in September. And because the secretive data analytics company is bleeding hundreds of millions of dollars in red ink and opting for a novel path to the public markets, a lock-up could provide a critical measure of stability.
Right now, experts told Business Insider, the direct listing is still an emerging alternative to the traditional IPO, with no set standards or commonly accepted terms — giving Palantir the freedom to call its own shots.
“It’s just two” direct listings to date, said Reena Aggarwal, a finance professor and director of the Center for Financial Markets and Policy at Georgetown University. “That doesn’t set a trend yet,” she continued.
Lockups are common in traditional IPOs
In a traditional IPO, companies raise money by selling shares to institutional investors who then turn around and create a market for the stock by selling some of those shares on a stock exchange. While employees, executives, or early investors often sell shares in the IPO, such insiders are typically barred from selling after that, generally for a period of 180 days. Some companies have had provisions in their IPOs that allow them to lift the lockup period early if their shares trade above a certain price for a sustained period.
By contrast, in a direct listing, companies are currently barred from selling shares. Instead, insiders make a market for their firm’s stock by selling some of their holdings directly to the public on a stock exchange. At least in the case of Slack and Spotify, employees, executives, and early investors could continue to sell in the days after the listing without any prohibitions. That allowed those insiders to cash in their stakes much earlier than they would have in a traditional IPO.
It’s unclear exactly how Palantir’s lockup period will work. The reports didn’t state whether it could be lifted early or whether it will apply to rank-and-file employees as well as to executives and early investors. It’s also not clear why Palantir planned to include a lock up with its offering.
The laws and regulations governing public offerings don’t mandate lockup periods, but they’re typically required by the investment banks that underwrite IPOs.
Lockups can prevent insider trading
The theory behind lockup periods is that they help prevent insiders who are aware of negative confidential information about the company from dumping their shares in the excitement following the IPO — and before that information becomes public, said Jay Ritter, a finance professor at the University of Florida who closely studies the IPO market. The side benefit of that is that they can lead to higher share prices, because investors don’t have to apply a discount to the stock for the possibility that insiders are selling based on such negative news, he said.
“I’m not at all surprised that Palantir has agreed to a lockup,” Ritter said.
Indeed, underwriters might add a lockup provision to the direct listing because investors expect them, said Greg Rodgers, a partner at Latham & Watkins who spoke generally about the thought process, not Palantir in particular. Rodgers represented Spotify on its 2018 listing and Slack’s financial advisers in the 2019 direct listing.
He said companies that use lockups in a direct listing can direct them at large, new, or other notable shareholders, while allowing employees or other smaller or longer-term investors to sell.
“In the direct listings seen to-date, they have not been used, largely I think due to the view that the larger the supply of shares, the truer the price set in the two-sided market place,” Rodgers said. “However, if the company is concerned about the short-term impact of over-supply on the trading price of the stock, there is nothing to keep them from imposing the disciplined release that lock-ups might provide.”
They may also limit volatility — or not
Palantir’s desire to shore up its share price may well have played role in its decision to include a lockup provision, Aggarwal said. Spotify and Slack’s shares traded down for weeks and months, respectively, following their direct listings.
If anything, the reception Palantir is likely to see from public investors is even more uncertain, given what’s been going on the markets. While the major indices have all bounced back from their coronavirus lows this spring and the S&P 500 and the Nasdaq are both at or near record levels, the markets have been highly volatile in recent months, Aggarwal said.
By including a lockup period in its offering, Palantir will likely be able to avoid some of that volatility, she said. Its stock would likely be subject to much more extreme swings if insiders were permitted to dump shares whenever they wanted in the days, weeks, and months after the listing, she said.
“I kind of think of a lockup as managing that volatility,” Aggarwal said.
Benchmark partner Bill Gurley isn’t so sure about that. Some research he’s seen indicates that Slack and Spotify actually had less volatility following their listings than the typical IPO, said Gurley, one of the most prominent advocates of direct listings in Silicon Valley.
Lockup periods tend to delay the process of finding an equilibrium price for a stock, he said. Many institutional investors refrain from establishing full positions in companies until after the lockup period has ended and all the insiders who wanted to sell have unloaded their shares, he said.
“If anything, I think the lockup could cause more volatility,” he said.
Bill Gurley’s a fan of direct listings, lockups or no
Regardless, Gurley doesn’t think the lockup provision, even if it’s widely adopted, will halt the momentum behind direct listings or make them less preferable to IPOs. Even with such a provision, direct listings still address the two big failings he sees in traditional IPOs — the fact that humans set the initial price of the stock and determine who gets the shares. Those factors can lead to big rises in prices when the stock starts trading and those rises can effectively represent huge transfers of wealth from the companies to the institutional investors that buy shares in the IPO.
“A direct listing that has those two problems fixed, I love,” Gurley said. “I kind of think of … the lockup change as
was the car mauve or red. I don’t care. That’s not the variable that matters.”
Palantir, founded by Peter Thiel, has spent nearly two decades as a private, venture capital-backed company, but one that’s been extraordinarily secretive about its operations and financial results. Those secrets are starting to come to light as it prepares to go public. The company announced last month that it had confidentially filed its draft offering paperwork.
A public filing from early July shows the company is in the process of raising $961 million in private capital. So far it has raised $550 million, mostly from the Japanese holding company Sompo Holdings.