In December of 2014, Lending Club (LC) was the darling of the IPO world, cannon-balling into the public markets with glorious fanfare and optimism. An early Fintech innovator, Lending Club was (and still is) the market leader in a most disruptive niche… online lending.
Lending Club was a well-endowed unicorn, indeed.
When Lending Club filed for an IPO, the company chose to offer access to its individual note investors… the first peer in “peer to peer lending”. These investors, in part, helped build the foundation of the core business of the company by group-funding each individual loan. IPO access was Lending Club’s way of saying thanks.
About a ten days prior to the IPO, Lending Club note investors (myself included) received an email offering the chance to purchase shares of the IPO before the opening trade. Lending Club, along with lead underwriters Morgan Stanley and Goldman Sachs, chose Fidelity to administer the directed share program.
The IPO ultimately priced at $15 per share. Investors that requested the maximum possible amount received 250 shares.
The stock opened at $24.75 and closed out the day at $23.43. That’s a 56% one-day gain enjoyed by those fortunate to get in on the action. Investors that reserved and received 250 shares were up $2,100 in less than 24 hours.
That kind of gain, the one-day pop, is why IPO investors seek out opportunities. That’s why you’re here.
Five trading days later, the stock hit a high of $29.29. Since that moment, the stock slow-dived into the low $20’s, then the teens, then under $10, and finally in recent weeks, the stock traded in the $3’s.
Only investors who sold the stock during the first month of trading locked in gains of greater than 50%.
Lending Club CEO Resigns
After the recent resignation of Founder and peer to peer visionary, Renaud Laplanche, Lending Club has quickly become a punching bag for market bears.
One man’s malfeasance has severely tarnished an entire industry. His resignation has sent reverberations throughout the online lending industry, overflowing into the tech IPO space. We were in the slowest tech IPO market in years. Then just like that, it got worse. Perhaps, rock bottom.
At its roots, Lending Club is a peer to peer lending platform; a place where individual investors lend money to individual borrowers. Each party benefits compared to traditional banking options. Borrowers get lower rates. Investors get higher fixed rate returns.
Lending Club’s technology makes this all possible, matching lenders and borrowers. The website has an elegant user interface, making the borrowing and lending experience easy and enjoyable. Revenue comes from loan origination fees and small debits from investor returns.
As borrower demand for loans increased, Lending Club began selling notes to various banks, hedge funds and other financial institutions that either held the loans or securitized them.
Why Offer IPO Shares to Individuals in the First Place?
Many note investors who participated in the IPO put their optimism for the long-term prospects of the company ahead of basic valuation metrics. At its peak, the market capitalization was in the area of $10 billion. Total revenue for 2014 was $211 million.
When investing in stocks, if you make 50% in one day, it’s always prudent to lock in some gains by selling at least a portion of shares. Caught in the euphoria of a successful IPO of an industry leading tech pioneer, many Lending Club note investors chose to hold the stock.
This leads us to why it makes sense for companies to offer IPO shares to individuals with existing stakes in the businesses. They’re loyal, they believe in the company’s future, and they’re less likely to sell the stock.
Loyal customers and stakeholders are more likely to hold for the long-term, lessening the downside risk of the stock price on the first day of trading, and leading up to and beyond the lock-up period.
These investors help build a base of long-term shareholders. They understand the business model and believe in it. Otherwise, they wouldn’t have entrusted their money to the company in the first place as lenders.
The idea of offering shares to stakeholders isn’t new. Employees, customers, and family members are often let in on IPO offerings. People with a stake in a company own through thick and thin and vote in the best interest of the organization.
Today it’s as easy as ever to administer such a program to the masses through the use of technology. Loyal3 was the first broker to capitalized on the relationship between the customer, company and shareholder, and marketed the IPO service to companies with a strong customer base. In the process, the company gains shareholders who are more likely to hold the stock and buy the company’s products. The administering broker gains new customers.
Motif Investing is not far behind Loyal3, striking a deal with J.P. Morgan to offer similar IPO opportunities to their brokerage customers. As the IPO market picks up, we expect to see greater IPO access for ordinary investors through brokers like Motif Investing and Loyal3 because the mutual benefit is clear.
Always Sell Early to Lock in Gains?
Selling Lending Club on the first day of trading would have garnered a healthy profit. But should IPO investors always sell their IPO shares on the first day of trading? It depends on who you ask.
Clearly, the answer with Lending Club was yes.
For investors happy to take their one-day returns and cash in, selling early is certainly a repeatable strategy.
However, they’d have missed out on a 284% gain in Globant (GLOB) stock, and a 135% gain in Dave & Buster’s (PLAY). Both were available on Loyal3. First Day sellers of Google (GOOG) are surely begrudged. But big mid to long-term gains like these are infrequent.
Early stage public companies can be difficult to evaluate without the quarterly reporting that we’re used to with more mature companies. It takes a good amount of research to determine the long-term profit potential and safety ratings of a new company.
Savvy IPO investors not interested in doing the research can simply opt out and sell shares on the first day.
But beware, selling early may restrict your ability to get in on future IPOs. Fidelity’s IPO policy, for example, flags investors who sell within the first 15 days of trading as flippers. Flipping restricts future access by 180 days for the first “offense”, 365 days for the second, and strike three places a permanent IPO ban on the account.
This rule applied to all the Lending Club IPO investors. But 15 days was plenty of time to exit. Though most were likely not eligible for additional IPOs anyways. Each was required to open a new taxable brokerage account and access to Fidelity IPOs is for high account value investors only.
Both Motif Investing and Loyal3 do no restrict or penalize selling on the first day. Loyal3, in fact, boasts that share retention rates are in the 90 percentile, because many shareholders come to the platform as fans of a particular brand. The first opportunity to sell Loyal3 IPO shares is at 2pm with its daily batch sale.
Motif Investing has indicated selling can commence once the stock is trading on the secondary market.
In my view, the investor advantage comes with knowing how to get into a high demand IPO. Once you do, selling early is a safe strategy for frequent IPO investors, regardless if the stock is up or down on the first day.
The only risk to locking in gains early is missing out on future gains.
The ability to evaluate a new company can be left to the masses, who make a buy or sell decision after the IPO stock starts trading. After the IPO investor locks in gains, they can always reevaluate. Only investors who fully understand the business and market fundamentals should hold on to the company, just like any other stock evaluation.
Lending Club is the only IPO I’ve invested in where I didn’t sell shares within a week. This is because I’m a firm believer (still) in the business model and technology platform. My stakeholder knowledge and, you could say, bias toward the business told me to hold beyond the IPO, even when valuations were clearly at the high water mark.
After its dangerous fall, I’m continuing to hold a stake in the company as I believe there’s value in the business. An outside buyer could be lurking, or this may an ideal opportunity to buy a fast growing company that’s only starting to eat away market share from the gargantuan banking industry. These are rosy scenarios. The risk of further pain is real. Since Lending Club stock is a small speculative holding in my portfolio, I am willing to keep the money at risk.
In hindsight, I was clearly wrong to hold through the high valuations. My personal investing strategy for any new IPO opportunity is the sell on the first or second day of trading, as long as future access isn’t impacted. This strategy worked for Blue Buffalo (BUFF), Teladoc (TDOC), GoPro (GPRO), and Dave & Busters among others on the Loyal3 platform. Selling early locks in the one-day pop, which is a byproduct of being informed about how to access IPOs.
If another unicorn comes along where the underlying business model is sound and valuations are fair, I’ll consider holding for the long-term again. However, next time I’ll place a stop loss order just above the IPO price.
Disclosure: The author is long Lending Club stock