What happened

Shares of electric-semi start-up Nikola (NASDAQ:NKLA) were trading sharply lower on Monday morning. The company said in a regulatory filing late on Friday that warrants held by some of its early investors can now be exercised, effectively creating millions of new shares of Nikola stock.

As of 10:45 a.m. EDT, shares were down about 19.6%.

So what

In a filing with the Securities and Exchange Commission after the U.S. markets closed on Friday, Nikola said that two series of warrants, which are securities that allow the holder to buy a share of common stock at a set price, can now be exercised. If all of the warrants are exercised, they will create nearly 24 million new shares of the company.

The warrants in question were initially issued to investors in VectoIQ Acquisition, the special-purpose acquisition company (SPAC) that merged with Nikola early in June in a deal that effectively took the truck maker public. 

A red Nikola Duo semi is shown hauling an Anheuser-Busch trailer.

Nikola plans to begin building its electric semis next year. Image source: Nikola Corporation.

The warrants trade freely under the ticker symbol "NKLAW." An investor holding one of the warrants has the right to buy one share of Nikola from the company for $11.50, which — at least as of Friday, when the stock was trading around $48 — was a bargain. 

For auto investors holding Nikola stock, the concern is that as investors exercise their warrants, new shares will flood the market and drive down the stock price. That's why shares fell so sharply on Monday morning.

Now what

While the investors who have held the warrants for a while can now realize tidy profits, folks probably shouldn't rush to buy them. Now that they can be exercised, the warrants will almost certainly trade at a price that makes it not very profitable to exercise them. (Remember that an investor exercising the warrant will have to pay Nikola $11.50 for the stock.) 

More broadly, investors should keep in mind that while not all the warrants will be exercised immediately, many of the early investors in VectoIQ will be looking to take profits in the near future. Or, put another way, expect a lot of selling soon.

Long story short: Don't be surprised if Nikola's stock price continues to be volatile for at least a few days.