“Lock-up” rules meant insiders were not allowed to sell until three months after the company’s May IPO.
The flood of 270 million new shares weighed on the stock in early trading on New York’s Nasdaq exchange yesterday, pushing them below the $20 (1,270p) mark at one point to just over half the $38 flotation price.
Investment bank Goldman Sachs, and Facebook board members James Breyer, Peter Thiel and Reid Hoffman are among those now free to sell stock they own. Microsoft, an early Facebook investor, is also freed of the lock-up but was thought unlikely to sell because of partnerships it has with Facebook.
Chief executive Mark Zuckerberg, who set up the social website eight years ago working from his student digs, will have to wait until November to start trading his 29 per cent holding, under a further six month lock-up rule.
Traders said it was unclear whether major investors were selling yesterday, or if the shares were falling in anticipation of greater availability.
Some analysts said the insiders would probably hang on to their stakes in the hope that the share price recovers.
But Frank Davis, director of sales and trading at LEK Securities in New York, said: “Pressure will be back on the shares now that liquidity is back in the market”
“If the value of your holdings has been cut in half, are you going to sit around and risk the rest of that?”
Despite soaring above $40 in the excitement of the first day of trading, briefly giving Facebook its much-hyped $100 billion valuation, the shares have since trended down as the firm failed to allay concerns over how it is going to translate its 900 million user base into profits befitting its status.
The IPO level priced in enormous earnings growth potential but in its maiden quarterly update last month Facebook, which made about $1bn last year, revealed slowing sales growth and failed to give a guidance of earnings. News that more users were using mobile phones to access the site also worried investors, as the firm has not yet found a way to run adverts on its mobile version.
Colin Cieszynski, a senior market analyst at CMC Markets, said the drop in share price had made Facebook’s valuation in relation to profits and forecast growth more reasonable. But he said rivals Google and LinkedIn and even established tech giant Apple looked more attractive on the same basis, and Facebook’s shares could yet fall further unless the company could provide some positive news.
“In order to rebuild confidence, Facebook first and foremost needs to stop disappointing on results and start to deliver,” he said. “Any progress on building advertising traffic, or putting the money it raised in the IPO to work could boost spirits and help the shares to stabilise. Further disappointments could keep the pressure on for some time to come.”
But Pivotal Research Group analyst Brian Wieser said the biggest worry for shareholders should not be yesterday, but the November lock-up.
“If the company’s perceived operating momentum doesn’t improve by then, there’s real trouble ahead,” he said.