Maybe there's some hedge fund guys in here that can answer this. But say you have a fund that owns a lot of shares of a stock that they are restricted from selling for 6 months. The stock goes on a massive run and the fund wants to dump their shares at these peak prices, but can't. Can they short the stock and then use their shares to cover when the lockup expires, or is there something in Rule 144 that doesn't allow that?
If a hedge fund owns restricted stock it's generally because they bought it directly from the company. And generally the company would have the basic intelligence to understand that the stock isn't effectively "restricted" if you can exactly replicate selling it at any time by selling the company stock short. Therefore they'd put some language around that in the "restricted" part of the stock sale agreement. Otherwise there's absolutely no point in calling it "restricted".
So I figure there’s two types of securities: Those that are available to trade publicly and those that aren’t (for example class B or warrants). In any case, I can’t see how the company can prevent a fund from hedging that position by shorting a different class or with derivatives. Companies prevent employees from trading their restricted stock awards, but they can’t prevent employees from shorting stock in the open market (except through employment terms). This is how it worked for me. I could buy puts however to hedge my restricted stock position. My firm had an entire team of people who helped business owners who sold their businesses to other companies for stock, to hedge those positions with cash secured reversals.
Right, then what they sell them isn't "restricted". My point being you don't have any companies who sell a tranche of stock with a restriction on selling before a certain date naively not grasping the fact that if the counterparty can short sell or buy puts or any other exact replica of selling. I can certainly see a way a company could sell a "restricted" stock tranche to a fund with a restriction on any form of selling it including short selling or derivative replicas. It would just require the right contract and the ability for them or some third party to look at the fund's trading records to verify compliance with the contract. I doubt that happens very often though.
Depends on the terms of the lock up. Generally no and generally no for lock up IPO stock. If most of the offering is lock it may also be HTB
I've seen a couple actual agreements from founders who sold their company for stock in the acquirer. They involved several pages of language to prevent them from doing what Mark Cuban did. I can certainly see that being absent in 1999, I don't think it is today. Not to mention, one wonders why Cuban had to pay big bucks to GS to "design" something as obvious as a synthetic short?
once those shares are eligible for registration you can treat them like shares bought in the after market. I don't see why they wouldn't be able to be used to cover a short once registered as free and clear.
In the 90’s access to derivatives was limited. Also with that much size, any bank would want a vig to offset lay-off costs. Plus tables at Le Cirque weren’t cheap.