An initial public offering (IPO) lock-up period is a contract provision preventing insiders who already have shares from selling them for a certain amount of time after the IPO. Although the waiting period varies on a case-by-case basis, it is typically 180 days. Investors should also note that the lock-up period is usually longer for special purpose acquisition company (SPAC) IPOs. Lock-ups for SPAC IPOs typically last 180 days to one year.
Lock-up periods generally apply to insiders, such as a company's founders, owners, managers, and employees. However, it may also apply to venture capitalists and other early private and crossover investors.
Key Takeaways
- An initial public offering (IPO) lock-up period is a contract provision preventing insiders who already have shares from selling them for a certain amount of time after the IPO.
- A standard IPO lock-up period is typically 180 days, while lock-ups for SPAC IPOs normally last 180 days to one year.
- The chief purpose of an IPO lock-up period is to stop large investors from flooding the market with shares.
- Lock-up periods are not required by the Securities and Exchange Commission (SEC) or any other regulatory body.
- Investors can sometimes save money by waiting until the lock-up period expires before buying the shares of a newly listed company.
Reasons for IPO Lock-Up Periods
The chief purpose of an IPO lock-up period is to stop large investors from flooding the market with shares, which would initially depress the stock's price. Simply put, company insiders tend to own disproportionately high percentages of stock shares compared to the general public. Consequently, their high-volume selling activities could drastically impact a company's share price immediately after the company goes public.
Lock-up periods can also eliminate the appearance that those closest to the company harbor a lack of faith in its prospects. Sometimes, insiders simply wish to cash in on long-anticipated profits. Unfortunately, that could create false perceptions that negatively impact the company for no legitimate reason.
Insiders might still be prevented from selling their shares after the lock-up period expires. That can happen when an insider has access to material, nonpublic information, where the sale of shares would legally constitute insider trading. Such a scenario might occur if the end of the lock-up period coincided with the earnings season.
Legal Status of IPO Lock-Ups
It should be noted that lock-up periods are not mandated by the Securities and Exchange Commission (SEC) or any other regulatory body. Instead, lock-up periods are either self-imposed by the company going public or required by the investment bank underwriting the IPO request. In either case, the goal is the same: to keep stock prices up after a company goes public.
The public can learn about a company's lock-up period(s) in its S-1 filing with the SEC. Subsequent S-1/As will announce any changes to the lock-up period(s).
Always investigate the lock-up period before investing in an IPO.
Investing Considerations
Many investment professionals, including Jim Cramer, sometimes recommend that investors wait for the lock-up period to expire before investing in newly listed companies. While new stocks can just keep going up during some bull markets, the market is not always favorable to IPOs. In less favorable environments, new stocks often fall in price when insiders unload their shares at the end of the lock-up period. Investors can then sweep in and get shares of the relatively new company at a discount. The chances of getting a bargain this way increase when insiders have large stakes in the company.
Waiting for the lock-up period to end also gives investors more time to consider the stock's performance. Did it drop right out of the gate? If so, it might be a good idea to invest in something else entirely. If the stock was looking good until the lock-up period expired, then it might still prove to be a sound investment.
Options Strategies
The IPO lock-up period also has some interesting implications in the options market. Options are not available on the day of the IPO. However, they often become available for large and even midcap companies before the IPO lock-up period expires. If investors are nervous about a potential decline in the stock after the lock-up period ends, they may be able to buy protective puts. Speculators may prefer to simply buy calls or puts, depending on which direction they expect the stock price will go.
Real World Example
Perhaps the most high profile example of a lock-up period occurred with Facebook (now Meta). After its May 18, 2012, initial public offering, the lock-up prevented the sale of 268 million shares during the company's first three months of public ownership. Facebook's stock price plummeted to an all-time low of $19.69 per share the day its first lock-up period ended. That is about 50% lower than the company's share price on the day the company went public. Interestingly, Facebook imposed stricter-than-normal restrictions that prevented the sale of another 1.66 billion shares through mid-2013. All told, Facebook's atypical lock-up policy released insider shares at five different dates.
FAQs
Key Takeaways
What is the purpose of an IPO lockup period? ›
The chief purpose of an IPO lock-up period is to stop large investors from flooding the market with shares, which would initially depress the stock's price. Simply put, company insiders tend to own disproportionately high percentages of stock shares compared to the general public.
What is the lock-in period in IPO? ›
The lock in period for an IPO is usually set at six months. However, it can be extended to 1 year. During this period an investor is not allowed to sell their shares. The purpose of a lock in period is to stabilise a company's share price before its investors can cash out.
How long does an IPO last for? ›
The IPO process is complex and the amount of time it takes depends on many factors. If the team managing the IPO is well organized, then it will typically take six to nine months for the company to complete its public debut. We've included a sample IPO timeline below for reference.
What happens to a stock after lock-up period? ›
The lock-up period is also important because large stock sales by people close to the company may give the impression of a lack of confidence in its prospects. It is common for the stock price of a company to go down permanently after the end of the lock-up period.
What is the primary purpose of a lockup agreement? ›
The purpose of a lock-up agreement is to prevent company insiders from dumping their shares on new investors in the weeks and months following an IPO. Some of these insiders may be early investors such as VC firms, who bought into the company when it was worth significantly less than its IPO value.
What is the lock up period clause? ›
Lock-up clauses generally establish a period of time during which certain parties are required to hold their shares, interests, or assets in a company without selling or transferring them.
What does "lock in period" mean? ›
Definition: Lock-in period is the time period for which the investment or the invested amount cannot be withdrawn or sold. The period is commonly used for ULIPs,mutual funds, etc. Description: Insurance policies come with the lock-in period giving investors a chance to preserve liquidity.
Can I sell my IPO shares immediately? ›
Yes, you can sell IPO shares on the day of listing. A retail investor who has received an allocation in the IPO may sell his shares at any time on or after the listing date.
What is the meaning of lock up days? ›
Your lock up days is the number of days it takes to convert your debtors, stock and work in progress into cash. The higher your lock up days, the more cash is needed in the business (either from you or the bank), and the higher the risk of losing that cash.
Indian Postal Orders provide a convenient means of transmitting small sums of money by post. Validity 24 Months.
What is the 3 day rule for IPO? ›
The 3-Day Rule is an informal strategy suggesting that investors should wait three days after a significant drop in a stock's price before buying shares.
How long after IPO can you sell? ›
An IPO lock-up is period of days, typically 90 to 180 days, after an IPO during which time shares cannot be sold by company insiders. Lock-up periods typically apply to insiders such as a company's founders, owners, managers, and employees but may also include early investors such as venture capitalists.
What is the purpose of a lock-up period? ›
Lock-up periods are when investors cannot sell particular shares or securities. Lock-up periods are used to preserve liquidity and maintain market stability. Hedge fund managers use them to maintain portfolio stability and liquidity.
What is the lockin period for IPO? ›
When investors buy shares in an IPO, they are lock-in for a period of time set by the underwriter. This is usually between 6 and 12 months but can be longer. If the investor sells their shares before the expiry of the period, they may have to pay the penalty.
What is the lockup period for IPO employees? ›
You usually can't sell your shares until a certain number of days after IPO, usually 180 days, unless it's a direct listing (like Spotify's IPO). This time is known as a “lockup period.”
What is the primary purpose of a lockup agreement to ensure? ›
The lock-up agreements provide the underwriters or placement agents with some assurance that new issuer securities will not be sold immediately following the proposed offering the sale of which might disrupt the trading market for the offered securities.
Why are there lock up periods for investor funds? ›
Lock-up periods are when investors cannot sell particular shares or securities. Lock-up periods are used to preserve liquidity and maintain market stability. Hedge fund managers use them to maintain portfolio stability and liquidity.
What is the difference between vesting period and lockup period? ›
Stock vesting allows employees to earn equity in the company over time and align their interests with those of the company's shareholders. Lockup periods prevent insiders from flooding the market with shares after an IPO.
What is the purpose of the IPO process? ›
Key Takeaways. An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Companies must meet requirements by exchanges and the Securities and Exchange Commission (SEC) to hold an IPO.
