| Programming note: Money Stuff will be off tomorrow, back on Thursday. Lockup waiver When you buy stock in an initial public offering, you don't know if you're paying the right price. Sure you're paying the price that everyone else is paying in the IPO, and sure that price is set by the IPO's underwriters at a level where they see a lot of demand, and sure it is generally justified by some sort of financial analysis suggesting that the stock is worth that price. But the company is brand new to the public markets and there is generally no previous trading price, and sometimes the IPO price will just be wrong. You—and everyone else who buys the IPO shares—will pay $25, and the stock will open for trading the next day, and, on the open market with willing buyers and sellers, it will turn out that it's worth $20. Oh well. Traditionally investors in IPOs want, and get, some protection from this risk. The simplest and most obvious protection is that the underwriters set the IPO price low: If it looks like there's plenty of demand for the stock at $28 per share, they'll price it at $25 per share, hoping for an "IPO pop" in which the stock trades up by 10% or so on the first day. This gives them some margin for error: Even if the stock doesn't trade up, pricing conservatively makes it less likely to trade down. And even if the stock does trade down, the fact that most IPOs have a pop is some consolation for investors: "Well," the underwriters can say, "we got this one wrong, but we gave you all those good ones earlier so you can't really complain." There are other protections. We talk sometimes about greenshoes and stabilization, a form of legal stock manipulation in which, if the stock looks like it might fall below the IPO price in early trading, the underwriters will buy some stock to keep the price up. They're not doing that for fun, or for profit, or even really to make the issuer happy; they're doing it to protect the investors in the IPO. It's a form of soft guarantee of the IPO price: "You can rely on this IPO price," the underwriters can say to prospective investors, "because if the stock falls below this price we'll buy it back." And then there is the lockup. The lockup is basically a promise that the company—and its insiders, founders and employees and pre-IPO investors—will not sell any more stock for, typically, six months after the IPO. The investors who buy stock in the IPO want to know that that's it, that no more stock is coming, for pretty straightforward supply-and-demand reasons: If the company (or its early investors) sells a bunch more stock the week after the IPO, that will tend to push the price down, so the investors want a promise that that won't happen. But they don't quite get it. The company and its insiders do generally sign lockup agreements promising not to sell any more stock for six months, but they don't sign those agreements with the IPO investors. They don't make those promises to investors, and the investors can't enforce them. Instead they sign the lockup agreement with the underwriters of the IPO. And the underwriters—actually a subset of the underwriters, just the one or two or three leading banks on the deal—can waive the lockups if they want. A month or two after the IPO, the company can come to the underwriters and say "hey we (or our venture capitalists or founders) want to sell more stock, will you let us?" And the underwriters can say yes or no, "in their sole discretion." Why would they say no? Well, they are in a repeat game of underwriting IPOs; they want to make investors happy. If they sold stock in the IPO at $25, and the stock is trading at $25.50 now, and selling millions more shares will push it down below the IPO price, and there's no desperate need for cash, then the underwriters will probably say no. Letting the company sell more stock, and pushing the stock price down below the IPO price, feels like a betrayal of the bargain that the banks struck with investors. Again it's not a legally enforceable bargain, but the investors might still get mad, and the banks want to keep them happy. Why would they say yes? Well, if the stock price has doubled in the month or two since the IPO, the investors really have no cause for complaint. If the underwriters sold stock in the IPO at $25, and the stock is at $50 now, and selling millions more shares will push it down to $40, then anyone who bought in the IPO still got a great deal and can't really claim to be disadvantaged by the new supply. What if the stock price is up about 800% in the three months since the IPO? Beyond Meat shares fell sharply in after-hours trading after the vegan burger maker said its early shareholders would be selling another chunk of stock, just two months after an initial public offering that was one of the hottest in recent years. The news overshadowed strong results in which quarterly sales more than tripled and the company raised its sales forecast for 2019. The new offering comes after Beyond Meat shares soared more than 700 per cent from their market debut, as investors bet on rising consumer interest in meat alternatives and on the company's plans to expand through new partnerships with restaurant chains around the world. The additional share sale would include between 3m and 3.49m shares from stockholders and 250,000 new shares from the company, it said. Just under 10m shares were offered in the IPO in May. The development sent the shares tumbling 13 per cent to roughly $192 in after-hours trading, on top of a 5.4 per cent fall in Monday's official session that snapped a seven-day winning streak. Yep! Increasing the supply of shares by a third will tend to drive down the price, and people who bought at $234.90 on Friday will no doubt be disappointed. People who bought the stock for $25 a share in the IPO, on the other hand, really can't complain. And the lockup was meant to reassure them, as they took a gamble on an untested stock at $25 per share; it wasn't meant for the people buying last week. By the way, this is all the sort of conventional analysis of the lockup, but there is one other consideration that is less often discussed. If the company or its insiders want to sell new stock three months after the IPO, they will need to do another registered offering, and pay banks a fee for underwriting it. The banks who are allowed to waive the lockup will, naturally, insist that they be the ones to lead the new offering and collect the fees. And in fact the banks in charge of waiving or enforcing Beyond Meat Inc.'s lockup were Goldman Sachs Group Inc. and JPMorgan Chase & Co., and those banks waived the lockup for the new offering, and they are the lead underwriters on that offering. Those things are not necessarily related—the fact that they led the last deal means that they have a good relationship and know the company, so you'd expect them to lead the next one—but it doesn't hurt the banks to have that leverage. An airdrop Overstock.com Inc. is a regular old U.S. public company. It "offers discounted brand-name merchandise for sale over the internet," according to Bloomberg's description. It is listed on the Nasdaq Global Market under the ticker OSTK; it has a market capitalization of about $775 million and trades about 2.7 million shares—about $60 million worth—a day. But Overstock, and its Chief Executive Officer Patrick Byrne, just love them some blockchain. "We are an online retailer and advancer of blockchain technology," begins Overstock's annual report. It has a blockchain subsidiary called t0, and it has been a leader in putting its own securities "on the blockchain." Meaning that if you buy certain kinds of Overstock securities—some bonds, its "Digital Voting Series A-1 Preferred Stock"—instead of holding them in the normal way (in an account at your brokerage which has an account at a depository, etc.), you will get them in the form of a ledger entry on a blockchain run by t0. This is … I don't know, if you're a certain kind of blockchain enthusiast, you might like this sort of thing, whatever. Also if you are interested in the potential for blockchain to improve the settlement of securities markets, etc., then Overstock's continued experiments with blockchain might be of interest to you. But they are mostly smallish lab experiments. Overstock's stock is still traded on Nasdaq, not the blockchain; the only people buying Overstock's blockchain stuff are the people who are predisposed to be interested in blockchain stuff. Until now! Overstock.com, Inc. (NASDAQ:OSTK) announces that its Board of Directors has declared a dividend (the "Dividend") payable in shares of its Digital Voting Series A-1 Preferred Stock (the "Series A-1"). The record date for the Dividend will be September 23, 2019, and the distribution date for the Dividend will be November 15, 2019. The Dividend will be payable at a ratio of 1:10, meaning that one share of Series A-1 will be issued for every ten shares of common stock, Series A-1 or Voting Series B Preferred Stock held by all holders of such shares as of the record date. If you own 100 shares of Overstock common stock in the regular way—bought on Nasdaq, held through your broker—then, congratulations, now you also own 10 shares of the blockchain thing. Even if you want nothing to do with it, you'll be dragged onto the blockchain. If you want to sell your blockchain shares, well, you will need to wait about six months for legal (securities registration) reasons, but after that you will need to, I am sorry, sell them on the blockchain. Byrne is elated: "Five years ago, we set out to create a parallel universe: a legal, blockchain-based capital market. We've succeeded," said Overstock.com founder and CEO Patrick M. Byrne. "The approximately 40,000 holders of the currently outstanding ≈37 million shares of Overstock will be issued a dividend of ≈3.7 million of these new digital shares to trade in that new capital market. Because the bundle of legal rights represented by each of these new A-1 shares is similar to the bundle of legal rights embodied in shares of our common stock (OSTK) that trades on NASDAQ, I might normally expect these blockchain-based A-1 shares to trade in rough approximation with OSTK. However, our legacy OSTK shares trade in a capital market with trading and settlement mechanisms about which I have long made my criticisms and doubts known to the public, whereas our new blockchain-based A-1 shares trade in a blockchain-based capital market which I believe is resistant to such dynamics. I cannot predict what kind of trading parity, if any, will emerge between the two. Perhaps arbitrageurs will notice and explore such matters, and in the process, punch a wormhole between the universe of legacy NMS and new universe of a blockchain capital market. I am going to be as interested as anyone else to see what the result of that will be." A wormhole! Look, he's right, this is cool. You see "airdrops" in the crypto world sometimes, as a way to bootstrap demand for a new token. The basic theory is that you can—just by copying and pasting the Bitcoin blockchain—give every Bitcoin holder one NewCoin for every Bitcoin that they hold. If you do that, then NewCoins will be widely distributed, and then maybe they'll start trading, and they'll have a value, and you can mint and sell more NewCoins. It is free for you to create NewCoins, but by giving away billions of them you can create a value for them, in the form of possible widespread adoption. This is the same thing but rather more daring: Instead of airdropping some weird new coin on Bitcoin users, Overstock is airdropping the crypto form of its stock on existing stock users. A few retail investors will probably ignore it. More professional but blockchain-averse investors will probably go to the minimum effort to sell the blockchain stock to the wormhole arbitrageurs. (And then use the cash to buy more regular stock to keep a constant ownership stake.) But some might fall in love with blockchain and migrate wholeheartedly to Overstock's blockchain platform, because this dividend led them there. By the way it is … gentle … of Overstock to do this with 10% of the company. It's a stock dividend; they could kind of do whatever they want. They could distribute 100 shares of blockchain stock for every 1 share of regular stock, migrating almost all of the ownership to blockchain all at once and making it impossible to acquire or maintain a big stake in Overstock without dealing in the blockchain stock. I suppose it would be too aggressive to do that now, while the blockchain market is pretty new, but if this works surely the ultimate goal is to migrate all of the stock to the blockchain? Don't put it on GitHub A recurring theme around here is that, if you are going to commit financial crimes, you shouldn't brag about your crimes in electronic chats or emails. They can search those things you know. The point of doing financial crimes, it seems to me, is to get a lot of money. Once you have the money, you should try to act like you got it in perfectly normal and not criminal ways. Emailing your buddies like "lol bro can't believe we did all those crimes, hope we don't go to jail" might liven up the experience for you but, I submit, it's not worth it. The point was to get the money; the email bragging doesn't get you any more money, but does increase your odds of getting arrested. If you must email your buddies to brag, say something like "hey want to go to the club and spend all of this money that I have acquired through legitimate means?" I don't know what the point of hacking into a bank's records and stealing millions of Social Security numbers is. You can't spend Social Security numbers. You can, I am pretty sure—I have not tried it—sell them on the black market, to people who will use them for identity theft and credit-card fraud and other bad purposes, so there is an indirect way to convert them into money. Presumably some people hack into companies's computers and steal Social Security numbers as a way to get a lot of money. But I get the impression that some people don't, that for some people the whole point of the operation is the bragging rights, that the goal is to find some permanent public forum in which you can type "bwahahahahaha, puny mortals, look upon my dastardly deeds and despair" or whatever. This creates an obvious problem: The point of the exploit is to become famous as its author, but if people know you did it, you go to prison. One solution to this problem—besides the obvious best solution of not doing this dumb thing for no material gain!—is pseudonymity. You set yourself up as like h4x0rKw33n420, you do some hacks, you got to the message boards and say "that hack was me, I rule, remember my name, h4x0rKw33n420," everyone is like "man that h4x0rKw33n420 really knows how to hack," but the cops can never trace h4x0rKw33n420 to your real name and address and you stay one step ahead of the law, constantly posting "bwahahahahaha, puny mortals, you will never catch h4x0rKw33n420!" When I type it like that it seems pretty clear that it shouldn't work, just on general hubris-hamartia grounds, and in fact it often doesn't. And when it doesn't, boy, I tell you, it is pretty embarrassing! For instance, if you have a clever online pseudonym and you do a brilliant catastrophic hack, you gotta—I am so, so sorry to say this—you gotta not link your hacking exploits TO YOUR RESUME: Evidence linking PAIGE A. THOMPSON to the intrusion includes the fact that information obtained from the intrusion has been posted on a GitHub page that includes PAIGE A. THOMPSON's full name – paigea*****thompson – as part of its digital address, and that is linked to other pages that belong to PAIGE A. THOMPSON and contain her resume. … As noted above, the GitHub address where the April 21 File was posted includes PAIGE A. THOMPSON's full name, paigea*****thompson. Clicking on the name paigea*****thompson in the address takes the user to the main GitHub page for a PAIGE A***** THOMPSON. The profile on that page contains a link to a GitLab page at www.gitlab.com/net***** (the "GitLab Net***** Page"). The GitLab Net***** Page includes, among other things, a resume for "Paige Thompson." That resume indicates that Paige Thompson is a "systems engineer" and formerly worked at the Cloud Computing Company from 2015-16. Oh man it hurts to read that. (Her full name does not actually contain asterisks; the FBI affidavit that I am quoting alters it like this.) Paige Thompson has been charged with federal computer fraud for hacking into Capital One Financial Corp.'s servers and stealing lots of user data. She also allegedly had a lot of the usual bad sort of braggy chats online, under the pseudonym "erratic": "I've basically strapped myself with a bomb vest, (expletive) dropping capitol ones dox and admitting it," Thompson allegedly wrote, under the "erratic" alias, in a June 18 Twitter message. "There ssns...with full name and dob" -- an apparent reference to Social Security numbers. … On June 27, "erratic" posted about several companies, including Capital One, in an online group, according to court records. "don't go to jail plz," another user wrote. "Wa wa wa wa, wa wa wa wa wa wa wawaaaaaaaaaaaa," Thompson responded, and later added, "I just don't want it around though. I gotta find somewhere to store it." Yes, great, "erratic" is a perfectly fine pseudonym for an evil-genius hacker, but you gotta keep it separated from your real name. Also from the vet bill: Online, she used the name "erratic," investigators said, adding that they verified her identity after she posted a photograph of an invoice she had received from a veterinarian caring for one of her pets. Honestly if I were president I would give her an immediate pardon. Either she is innocent and is being rather unsubtly framed, or she is guilty and no punishment can compare to the embarrassment of being caught like this: Thompson, 33, was charged with computer fraud and abuse. In a court hearing Monday, she broke down and laid her head on the defense table. I would too! Also: Most Social Security numbers were protected, but about 140,000 were compromised, the bank said. Capital One said it was "unlikely that the information was used for fraud or disseminated by this individual." She apparently didn't use the Social Security numbers to do fraud or identity theft, or sell them to someone who would. The only point of this whole dumb thing was to see if she could do it, and then brag about it online. Oops. Hedge fund fees Well, sure, yes: Billionaire Jeff Talpins is hiking performance fees in his macro hedge fund to a whopping 40% even as rivals slash costs for their investors, according to a person with knowledge of the matter. Element Capital Management is increasing the share of profits it charges by 15 percentage points. The New York-based firm is also lowering its management fee from 2.5% to 2%, which is still higher than what most hedge fund managers charge. The move, which takes effect at the end of this year, is a testament to Element's standout performance -- 20% annualized returns since inception -- with a strategy that has faced tough conditions. … While the average macro fund posted annualized gains of 1.7% over the last four years, Element returned 16%. There are two possibilities here. One possibility is that Talpins provides true high sustainable alpha; the other is that he has gotten consistently lucky. If he is really generating alpha—if he has some sustainable repeatable process that allows him to beat the market consistently—then he should definitely charge high fees, because that is rare and good. Theory suggests that hedge fund managers who demonstrably generate alpha should charge fees equal to about 100% of the alpha that they generate; this is called the efficient markets hypothesis. On the other hand, if he got lucky, then he should definitely charge high fees! What if he stops getting lucky? Better to harvest all the money you can now, while people think you're good. Tighten your liquidity terms while you're at it! Reverse hedge fund fees I don't know, here's a story about Jeffrey Epstein and Alan Dershowitz: Epstein could be a loyal supporter. Early in their relationship, he contacted Orin Kramer, the founder of the hedge fund Boston Provident, and said that he wanted to invest several hundred thousand dollars from Dershowitz. It was a small sum for Kramer's fund, but Epstein, who had recently invested thirty million dollars in the fund, was a significant client. Kramer agreed to take Dershowitz's investment. The next year, after the fund sustained enormous losses, Epstein contacted him again and said, "One of us is going to make Alan whole—and if I have to do it, that is an outcome you will regret." Kramer was taken aback; Dershowitz had signed papers, which are standard among hedge-fund investors, acknowledging that his money was at significant risk. Ultimately, though, he agreed that he would personally restore Dershowitz's investment if Epstein left the remainder of the money he controlled in the fund. (Dershowitz says that he never heard that Epstein had made this call, and that he understood Kramer had restored his money because he felt a "moral obligation.") It is funny to think about the power dynamic that would allow a limited partner in a hedge fund that lost money to just be like "no thank you I would prefer not to lose any money, please give me my money back." Presumably huge institutional investors—Calpers, say—can't do stuff like this, not only because they are too big (where would the manager get the money to make them whole?) but also because they are just institutionalized and legalistic enough not to ask for weird special favors. And presumably small accounts—other than, like, the manager's mother—can't do stuff like this, because they have no bargaining power and the manager can just ignore their demands. But there is apparently some middle ground of large but strange investors who can maybe try it. Sometimes it works! Things happen Citi to Cut Hundreds of Trading Jobs in Bad Sign for Wall Street. Wall Street's equities titans are in the midst of an expensive technological arms race. Boom in Refinancing Boosts Mortgage Lending. The SEC is stepping up scrutiny of mutual funds that have poured money into unicorns like WeWork and Airbnb. BOE Vows to End Too Big to Fail With New Bank Resolution Rule. Dirty Money Spotlights Role of Family Offices as Enablers. Uber Lays Off 400 as Profitability Doubts Linger After I.P.O. Libra crypto may never launch due to regulatory scrutiny, warns Facebook. A Property Theory of Corporate Law. Citigroup Hired Three Criminals Due to Poor Background Checks. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! |
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