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Why FaZe Holdings Stock Got Hammered Today

What happened

Shares of esports company FaZe Holdings (FAZE -22.55%) got hammered on Thursday after it filed an amended registration document with the Securities and Exchange Commission (SEC). The stock is a favorite for traders, and small news items can drastically move the stock, as we’re seeing today. As of 12:50 p.m. ET, FaZe stock was down a whopping 22%

So what

In August, FaZe filed an S-1 — the document all companies file when going public — in relation to its merger with a special purpose acquisition company (SPAC). Today, FaZe filed an amended S-1 with the SEC, its fourth amendment this month. The filing states that it neglected to include Exhibit 5.1 in its last filing, which is the legal opinion letter from its law firm. 

Without this document, FaZe’s stock offering can’t be considered “effective.” And if it’s not been declared effective by the SEC, then insiders can’t sell their shares. 

By filing its amended S-1 today, FaZe is one step closer to the effectiveness of its securities registration. Once the SEC makes its declaration, it opens the door for immense selling pressure as insiders will be able to exit their positions. Therefore, traders are selling today, anticipating things will get worse in the days ahead.

Now what

As is typical of SPAC stocks, FaZe insiders (shareholders from when it was a private company as well as the investors and sponsors that brought it public) own more than 80% of the company. Many shares are subject to a lock-up period during which they can’t be sold. But investors are right to be somewhat fearful of FaZe stock right now. Insider selling is a big reason why most SPAC stocks lose to the market. And even if there are lock-up restrictions, they all expire sooner or later.

That doesn’t mean that FaZe’s business can’t create value over the long term — it can. And it doesn’t necessarily mean that FaZe’s bigger shareholders will start selling the first chance they get — they could hold. However, investors interested in this esports company should prudently wait for greater clarity with this common SPAC issue before considering a buy-and-hold purchase.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Read More: Why FaZe Holdings Stock Got Hammered Today

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