The impending expiration of the lockup agreement in the context of Trump Media & Technology Group Corp. (Nasdaq: DJT) raises some fascinating legal issues, as well as a once-in-a-lifetime case study on the market implications of post-lockup stock sales.
Lockup agreements are a critical part of any initial public offering (IPO), including in connection with deSPAC mergers. The purpose of lockup agreements is to prevent insiders and major pre-public offering investors from selling shares of their stock during a particularly delicate period of time following the initial offering and the listing of the operating company’s stock on Nasdaq or the New York Stock Exchange (NYSE). Due to limited public float with which public shareholders can trade, the stock can be highly volatile in the early days of trading. Large sales increase the supply of available shares on the market and can place significant downward pressure on the public stock price, negatively impacting the share price. In addition, and as more fully discussed below, sales by insiders may be viewed as a negative signal by the market and public stockholders, who may in turn sell their stock, increasing the potential negative impact to the stock price.
The vast majority of lockup agreements for pre-IPO holders are 180 days for traditional IPOs, with occasional variations for staggered or performance-based early releases. In most special purpose acquisition company (SPAC) transactions, the target company holders also are expected to sign a 180-day lockup, again with some variations based on length and the potential for staggered releases based on stock price.
In the case of DJT, the lockup period applicable to former President Donald J. Trump and other pre-deSPAC stockholders is set to expire after market close on September 19, 2024 – provided DJT’s common stock closes above $12.00 per share – just shy of 180 days following the closing of the deSPAC merger transaction. This means that the 114,750,000 shares held by Trump, including 36 million earnout shares he was issued in April of this year, will be eligible for sale into the market.
As a starting point, it is not uncommon to see a significant increase in the volume of sales following the expiration of lockup periods, usually resulting in at least some decrease in the stock price. Ultimately, the impact will depend on the extent of these sales and the market dynamics at the time of the release. But there are some extraordinary aspects to DJT that have never been seen before.
What would Trump’s sales mean to the market?
Sales by insiders of any company pose the risk of being viewed by the market as a lack of confidence in the prospects and future valuation potential of the company and/or an intent to decrease connectivity or support for the company (i.e., “getting out of the stock”). In some cases, particularly with CEOs and founders, the market may even assume that the insider selling stock is aware of headwinds or challenges that the market may not be alert to. Though it would constitute “insider trading” if an insider sold stock in possession of material negative information that was not publicly disclosed, the market may assume it to be less about a particular missing piece of information and more of a general assessment based on a deeper knowledge of the business than what analysts and investors can glean. Investors also may view their investment in a public company as an opportunity to invest in, or alongside, management, particularly in the case of very high-profile CEOs and founders – and, as a result, align their investment decisions with those of such individuals. This is why the case of DJT is so interesting, because its success or failure may not follow typical market dynamics. Of course, often times institutional investors are looking for larger positions in a public stock that they cannot obtain easily in standard market purchases, and Trump could make room for other desirable investors by agreeing to sell them a large chunk of his shares, without the dilution that would come from DJT having to sell more primary shares.
What are DJT investors investing in?
SPACs have frequently been used as vehicles to allow highly innovative companies in less understood or nascent markets – for example, alternative energy, electric vehicles and mobility – to access public investors that are willing to give them more time to achieve their business goals than many of the tech companies using a traditional IPO. So it is not entirely surprising to see a multibillion-dollar valuation for a company that went public via a SPAC and has transformative technology but limited revenue and an uncertain path to profitability. While Truth Social’s performance has been subpar by most traditional financial and operational metrics, it does have a devoted following of engaged users, and there is plenty of room for growth in a society with an insatiable demand for online content. DJT’s valuation – even with its stock price down more than 70% from its high watermark shortly after the closing of its deSPAC transaction – still reflects an extraordinary positive multiple of its current financial results. One explanation for this valuation is that investors are investing in Trump himself and, in particular, his potential return to the White House. However, even if it is reasonable to conclude that a meaningful portion of retail public investors are likely supporters of Trump, DJT has several institutional investors that see a future for the company. Whatever the motivations, it is impossible to ignore the close connectivity between the businesses of DJT – particularly, Truth Social – and the potential electoral success of Trump himself. If he is reelected, it is likely that communications from the president of the United States will largely flow through Truth Social. If his reelection bid fails, though, how much will the market expect from this social media app? While it is not possible to predict the outcome of the election with any degree of certainty, it does seem reasonable to assume that a considerable amount of the value of DJT is dependent upon the outcome of the election.
How does the election factor into the market prognosis?
DJT’s stock price saw massive gains in the immediate period after the merger was announced followed by a period of volatility, but has consistently declined since it closed at $40.58 per share on July 15, a day that Trump’s reelection prospects, according to many prognosticators and betting sites, peaked before also declining. If DJT’s stock price does in fact serve as something of a proxy for the election outcome, then sales by Trump could have the dual effect of decreasing the stock price and creating the perception that Trump has doubts about the outcome of his presidential bid. As such, Trump is faced with a difficult, if not unprecedented, decision when the lockup expires. Vice President Kamala Harris’s election fortunes further complicate the situation. Should her poll numbers continue to rise, the value of DJT shares may decline as a result, prompting Trump to feel pressure to sell before too much value is lost. Such sales, though, could cause further degradation in the stock price. All of these possible outcomes aside, Trump has indicated to the public multiple times that he does not intend to sell any DJT shares, which in and of itself caused the DJT share value to jump 12% on September 13 following his most recent assurance, before giving back those gains in subsequent trading days. It’s not unusual for founders or large key insiders to assuage market fears by asserting a commitment to hold the stock over the long term, but an imminent presidential election looms as a potential pivot point in a way that we would not typically expect.
What about insider trading?
We noted that sales by insiders often raise eyebrows about what information they might have to drive that sale decision. In the case of DJT, it is impossible to know how much information Trump receives about the company, because even though he owns nearly 56% of the shares, and the company’s board and management team are populated by what appears to be his inner circle, Trump is not an officer or director of DJT. One way insiders deal with the risks of insider trading and the potential negative optics is to put a 10b5-1 sales plan in place that allows for pre-set sales over time pursuant to the plan. Trump does not have any such plan in place as of the date of this publication, so each sale would be determined by him, or his investment advisers, at the time of sale.
Post lockup, how many shares can Trump sell?
Trump’s shares are registered for resale under a Form S-1 registration statement, so in theory, they can all be sold. In practice, however, it will not work that way because Trump will need to find buyers for all of his shares. These would typically be done in chunks of block trade sales or pursuant to a registered offering, where a large number of shares are placed by a syndicate of underwriters largely to new institutional investors. In either of these situations, the total number of shares will likely be limited to only a portion of Trump’s total holdings, and any such transaction would require disclosure to the market in advance of the sale, likely depressing the price at which Trump can sell. In a registered underwritten offering, Trump also may be required to sign a new lockup for at least 90 days for the remainder of his shares. Moreover, a sale of all or substantially all of his shares would likely result in a change in control of the company and require significantly more time to complete.
Must Trump disclose his sales?
As noted above, in any marketed sale to the public, Trump would have to disclose such a sale in advance as part of his marketing efforts and in compliance with applicable securities laws. Trump could sell shares in transactions that are not publicly marketed, in which case he may not have to disclose to the market that he is making such a sale in advance, but in practice it may be difficult to sell a substantial number of shares at anywhere close to market prices without marketing them. In any event, Trump would be required to publicly report such a sale to the Securities and Exchange Commission (SEC) by filing a Form 4 pursuant to Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”) within two business days following such a sale.He may have additional, more detailed reporting requirements under Section 13 of the Exchange Act if the sale is for greater than 1% of DJT’s common stock. It seems likely that a small transaction would be inadvisable from a financial perspective due to the negative impact the reporting of such a transaction would have on the value of Trump’s unsold securities. In order to monetize a substantial portion of his holdings without notifying the public in advance, Trump would have to find a party willing to buy his shares directly, knowing that the transaction would be announced to the public shortly thereafter, and that the stock price would, in all likelihood, suffer significantly as a result. If it is indeed the case that a significant portion of the value of DJT to its investors is Trump’s involvement, then his reporting obligations may limit his ability to get market value for his shares and, perhaps somewhat counterintuitively, act as something of an optics-based lockup in the absence of a contractual one.
Ultimately, this is a complicated yet fascinating situation, to say the least. Although the issues at play in the case of post-lockup sales of DJT raise many of the same legal and market questions routine investors and shareholders often consider, the unique electoral backdrop and potential consequences flowing from any sale of stock in this particular company have implications well beyond those we traditionally see. As this election cycle has already demonstrated, nothing is certain, and what lies ahead for DJT investors is no less unpredictable.
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