What happened

Shares of Wrap Technologies (NASDAQ:WRAP), a start-up maker of non-lethal restraint devices for police, saw its shares pummeled in early trading on the Nasdaq Monday, down 16%, before the stock clawed its way back to about a 7.2% loss as of 12:30 p.m. EDT.

But what made Wrap unravel so badly in the first place?

Glowing red stock chart arrow trending down.

Image source: Getty Images.

So what

Basically, here's what happened: Up until about a month ago, Wrap was a no-name stock with no profits and barely any revenues (about $1.3 million booked in the last 12 months), bouncing around between about $3 and $4 a share. When police equipment makers began making headlines in late May, however, through a combination of headlines about excessive use of force and worries about unruly protesters, investors began placing bets that Wrap's "BolaWrap" device for restraining suspects would become a popular solution to both issues.

Presto-change-o, Wrap became a popular stock, with a price tag soaring close to $10 a share.

Now what

Now, some of Wrap's insider shareholders want to capitalize -- literally -- on the stock's newfound popularity by selling and converting into cash about 3 million of their shares at a share price much higher than what they fetched just a month ago.  

There are two problems with this: First, the price of the shares being sold -- about $7.18 per share, according to a Securities and Exchange Commission (SEC) filing made after close of trading Friday -- is substantially below the stock's highest price of last week. Investors who already own the stock aren't much pleased with the discounted price, which makes their own shares look overpriced by comparison, and so they're selling their shares, exiting positions, and taking profits alongside the insiders.

Second, because all 3 million of the shares on offer are coming from "directors or officers of Wrap Technologies," this sale appears to indicate a lack of faith in the stock continuing to rise -- yet another reason the sale is making outside shareholders nervous.

Put these two factors together, and you get what we're seeing today: A sell-off at Wrap.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.