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Plan was set up months ago to sell, to avoid accusations of insider trading
After its lockout period ended last week, and Facebook freed up over 271 million shares to be sold by executives and investors, the stock hit its lowest levels yet, dropping to 50% of its IPO price on Friday. So did investors decide it was better to get out now, even though the stock was so far down?
It is now known that at least one prominent Facebook investor sold off his stock, though he seems to have done so months in advance.
Peter Thiel, whose $500,000 investment in 2004 made him the first outside investor in the company, sold over 20 million shares of Facebook stock this past Friday and Saturday, according to a document with the Securities and Exchange Commission.
The stock was sold at prices between $19.69 and $20.70, netting Thiel roughly $406 million. Thiel now only owns 5.6 million shares of Facebook stock.
A large part of the filing was done by the Founders Fund, a venture capital firm at which Thiel is a partner. Lembas LLC and Rivendell One LLC, which are Thiel holding companies, did the rest of the filing.
Why Thiel sold
According to the SEC docment, the shares sold were “effected pursuant to a Rule 10b5-1 trading plan adopted by the reporting person on May 18, 2012.”
So what exactly does that mean?
Law firm Morrison & Foerster explains the rule as, “Any person executing pre-planned transactions pursuant to a Rule 10b5-1 plan that was established in good faith at a time when that person was unaware of material non-public information has an affirmative defense against accusations of insider trading, even if actual trades made pursuant to the plan are executed at a time when the individual may be aware of material.”
What this does it allow executives and directors in a company to sell their stock before they have any inside knowledge so that they cannot be accused of insider trading.
In essence, Thiel sold off his stock months ago, when it was worth nearly twice what it is now.
That Thiel set up this plan sheds some light his actions last week, then he filed a document with the Securities and Exchange Commission that gave him added flexibility to sell more of his holdings.
The form, filed on August 10, converted more than nine million of Thiel’s Facebook shares from Class B to Class A.
Class B shares generally come with more voting rights than those that are Class A. While this is not always the case, a Class B shareholder will commonly receive extra votes to approve changes within the company. It can be five, 10, or even 100 votes, depending on the company. Class B shares are owned by those who have an interest in running the company, while those who have Class A stock are in to buy and sell for profit.
That Thiel, who had more than 27 million shares of Facebook, most already with Class A status, would convert his shares into those that are easier to sell off should have been a big red flag for what his intentions were.
Other upcoming lockup dates to put on the calendar for Facebook include October 15 through November 13 when directors and employee can release 243 million shares, then November 14 when more VCs and Mark Zuckerberg can unload up to 1.3 billion shares and the December 14 when later stage VC can release up to 149 million shares.
Facebook stock was up 5% at the end of regular trading on Monday, to $20.01. The stock is down slightly in after hours trading to $19.99.
(Image source: kristiriley.com)
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