Palantir is one of the few companies to ever go public in a direct listing, but it’s borrowing an IPO tradition by putting ‘lock-ups’ on insiders

  • Palantir direct listing paperwork includes a provision that will bar insiders, including its top executives, from selling a portion of their shares for several months after the offering.
  • That provision, called a lock-up period, is common in traditional initial public offerings, but hasn’t been included in the two notable direct listings to date, those of Spotify and Slack.
  • Insiders would be allowed to sell a portion of their shares in the listing, but will be prohibited from selling more until after the company discloses its full-year results for 2020, likely in the winter or spring next year.
  • Palantir did not say how many shares insiders will be permitted to sell, but previous reports stated the company will limit them to selling  20% of their holdings.
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Palantir’s executives, directors, and some of its early investors won’t be able to fully benefit from the company’s direct listing of its stock due to a provision it brought over from more traditional public offerings.

The company is putting in place a so-called lockup period that will bar insiders, including CEO Alex Karp and board member Peter Thiel, from selling a portion of their shares until sometime next year, it revealed in the offering paperwork it made public Tuesday. Palantir’s document did not reveal exactly how many shares will be affected by the lockup period or precisely which insiders will be affected by it.

“Our executive officers, directors, and certain record holders of our capital stock and securities convertible into or exchangeable for our capital stock … have entered into lock-up agreements with us under which they have agreed not to sell, offer, contract to sell, pledge, grant any option to purchase, lend, or otherwise dispose of shares of our capital stock,” the company said in its paperwork.

The filing confirmed reports last week from The New York Times, The Information and Tech Crunch that Palantir’s listing would include a bar on insiders selling a portion of their shares. According to those reports, the company will limit insiders to selling 20% of their shares in its offering.

In a standard initial public offering, a company creates a pre-determined set of new shares that it sells to pre-selected institutional investors at a pre-set price, a move that’s brokered by investment banks. In some cases, early shareholders in the company also some of their stock in that offering. The investors who buy shares in the IPO then turn around and sell a portion of them to the public via a stock exchange on the company’s first day of trading, typically the next day.

Palantir is breaking with precedent

Most IPOs include a lock-up provision that typically bars insiders from selling shares for three to six months, except under certain conditions. The provision is meant to hamper insiders from trading on secret negative information in the days and weeks following the IPO and to limit volatility in the share price of the affected company by preventing insiders from flooding the market with new shares. 

By contrast, in a direct listing, a company’s private investors create a market for its shares by selling some of their stock directly to public investors via a stock exchange, without going through middlemen or using an investment bank to set a price or line up buyers. Under current marketplace rules, companies are prohibited from selling shares out of their treasury in a direct listing.

To date, there have only been two notable direct listings in the US— Spotify in 2018 and Slack last year. Neither one of them included a lock-up period. Indeed, for insiders, including company employees, one of the advantages of having a direct listing was that they were able to sell shares much sooner than they could with an IPO.

Palantir’s lockup period is breaking with those precedents. Insiders will of course be able to sell some of their shares in its offering — after all, there would no stock available for public investors to trade if they didn’t — but not all of them. Instead, they’d be barred from selling a portion of their holdings until the third day of trading after the company reports its full-year results for 2020, likely sometime next winter or spring.

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