Tesla: Selling More Shares Than Cars

NEW YORK ( TheStreet) -- Tesla ( TSLA) 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.

Plenty of companies in the clean tech sector have dealt with similar stock overhang issues, and Tesla investors will have to be familiar with the issue of venture capital stock holders selling into the open market from time to time.

It wasn't clear on Monday whether it was venture investors selling as the lock-up period ended, or simply share dilution fears leading investors who had already booked tidy profits in Tesla shares since the IPO selling on the news of the lock-up period ending.

The news of the lock-up period wasn't new -- it was in Tesla registration statements on file with the Securities and Exchange Commission. In fact, Tesla had to disclose in SEC filings that the end of the lock-up period could lead to a depression in share prices as venture investors are given the right to execute private placements.

Last week, Capstone Investments analyst Carter Driscoll downgraded Tesla to a sell with a price target of $22.

Capstone Investments' analyst Driscoll wrote in an email to TheStreet on Monday that given the end of the lock-up period was a fact fully disclosed by Tesla, and should not have taken investors by surprise, the level of the weakness in Tesla shares on Monday was a little surprising.

Tesla shares fell below the $26 mark on Monday morning after their 13% decline. In the past three months, Tesla shares have gained 30%. Tesla shares hit their 52-week high on Dec. 1, at 36.42.

-- Written by Eric Rosenbaum from New York.

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