Facebook Stock Falls Major Investor and Insider Peter Thiel Dumps most of his Stock

Facebook’s initial public offering (IPO) appeared to be a textbook case of an IPO gone wrong, but there is no simple truth about why the IPO went wrong. Search Engine Journal reports that Facebook’s  IPO launched with a $38 share price and a staged series of “lockups” that prevented different classes of investors from selling until specified dates.

On August 21, the stock had fallen to $19.14 per share, or about half the initial offering price. ” Inside investors” were prohibited from selling their stock until a week ago, and Facebook’s major insider investor has shed a large portion of his stock in a hurry. 

Peter Thiel, who was an early Facebook investor and board member, shed $400 million of his Facebook shares. This represents more than 80 percent of his holdings. He still holds $107 in Facebook stock. Thiel is also the former CEO of PayPal. At stake are an additional $1.5 billion in Facebook stocks that could be set loose on the market. This brings into question whether an investor who sits on the board of a company while investing on the open market qualifies as an insider who might have an advantage over the street investor.

Not so well known is that Thiel is actually associated with investment machines that own most of the Facebook shares that were sold. In all, he has connections to 20 million of the total 27.9 shares that were on the market. As an example, the Founders Fund reportedly sold 2.6 million of its 6.8 million shares in August, and Thiel is also a partner in that fund.

There is more to come. Another 216 million shares will be unlocked on October 16, and a whopping 1.2 billion shares will be unlocked on November 15. In other words, most of the common market shares are still locked in and cannot be sold. There is no idea what they will be worth on such a short term basis, or whether those investors will recover much of their money. 

USA Today  indicates that social media giants may have problems when they go public. There are no easy answers because many “analysts” seem to have a stake in convincing investors not to sell. Analysts claim that there has not been a rush on selling Facebook shares yet, but that statement is meaningless. Strict “lockup rules”  prohibit any “rush” until the lockup periods end.

One explanation for the early insider sales is that the “insiders” and early investors generally take their money out quickly in order to invest it in other startups or opportunities. As analysts admit that insider investment is temporary, they must also admit that such behavior is an inherent risk to street investors, who could be misled by early insider IPO purchases that inflate early stock prices.

Mashable reveals another fact about the Facebook IPO: there are Class A shares and Class B shares. The Class B shares have ten times the value of Class A shares, and they are owned by Facebook Founder, Mark Zuckerberg. 

Whether it is time to depose Zuckerberg and replace him with a professional CEO, or whether Facebook will suffer from a huge rush to dump the far less valuable Class A shares, very little looks good right now.