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Tesla: Selling More Shares Than Cars

NEW YORK ( TheStreet) -- Tesla (TSLA - Get Report) has sold about a shopping mall parking lot full of electric cars in its history -- yet, on Monday, the pioneering electric car IPO darling was selling plenty of its shares, not the pickup in sales activity on which Tesla shareholders have been betting.

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The 180-day lock-up period for early investors in Tesla to sell shares -- primarily venture capital investors -- ended on Monday, and as many as 75 million Tesla shares previously prohibited from hitting the open market were free to trade.

It's a classic supply-and-demand issue, from the most general perspective, with available shares for trading, at least, in theory, about to quadruple.

Tesla shares were down 13% on Monday morning -- with the decline widening as high as a 15% drop at one point -- and with close to four times its average trading of 1 million shares traded before midday.

Tesla shares were the biggest market loser on a light day of trading on Monday.

There are roughly 93 million shares of Tesla stock outstanding, and according to the terms of its lock-up period, 75 million shares were prohibited from being sold until Monday.

The end of the lock-up period doesn't mean that venture capital investors are rushing en masse to sell their Tesla shares. However, the end of the lock-up period presents a classic problem for a stock in a sexy sector that has been backed by venture capital and taken public with much fanfare: namely, the overhang on the company's shares as venture investors are given the freedom to exit their positions when they want and in whatever amount they want to offer into the market.

It's not as if the company itself is doing a secondary offering, which is a market event that always causes a sell-off in shares, based on fears that the secondary will cause dilution in existing shareholders' stock.

It can take days, weeks, months or years for venture capital investors to exit large holdings in clean tech companies that they have backed, and the investors often exit in successive transactions, meaning the issue won't be going away anytime soon for Tesla or its shareholders. When the percentage of share held by venture firms is a majority of the outstanding shares, as in Tesla's case, it means the overhang on the stock can linger for a considerable amount of time. Every time an early Tesla backer announces a major share sale, Tesla shares may be hit by a negative day of trading.
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