An original public offering (IPO) lock-up period is a contractual restriction preventing insiders who acquired shares of a company’s stock formerly it went public from selling the stock for a stated period of time after it goes public. Although this break period varies on a case-by-case basis, it typically ranges from 90 to 180 days after the date of the IPO.
Lock-up eras typically apply to insiders such as a company’s founders, owners, managers and employees. But it also may apply to venture capitalists and other beginning private investors.
The chief purpose of an IPO lock-up period is to thwart investors from flooding the market with ginormous numbers of shares, which would initially depress the stock’s price. Simply put: Company insiders tend to own disproportionately important percentages of stock shares compared to the general public. Consequently, their high-volume selling activities could drastically modify a company’s share price immediately after the company goes public.
Lock-up periods don’t just stave off the short-term dissenting economic ramifications that may occur from insiders selling large chucks of their stock positions after an IPO. Lock-up aeons can also eliminate the appearance that those closest to the company harbor a lack of faith in its prospects. Even if this is not in reality the case, and that in reality, insiders simply wish to cash in long-anticipated profits, this false perception could potentially impair a company’s long-term stock performance for no truly legitimate reason.
In some cases, insiders may be forbidden from grass on their shares, even after the lock-up period expires. This most often occurs when an insider obtains material, nonpublic information, where the sale of shares would legally constitute insider trading. Such a structure might occur if the end of the lock-up period coincided with earnings season.
It should be noted that lock-up terms are not mandated by the United States Securities and Exchange Commission or any other regulatory body. Rather, lock-up periods are either self-imposed by the companionship going public, or they are required by the investment bank underwriting the IPO request. In either case, the goal is the same: to prohibit stock prices soaring after a company goes public.
Perhaps the most high profile example of a lock-up span occurred with Facebook. After its May 18, 2012, initial public offering, the lock up prevented the sale of 271 million dole outs during the company’s first three months of public ownership. Pointedly: Facebook’s stock price plummeted to an all-time low of $19.69 per divide up the day its first lock-up period ended. This is about 50% lower than the company’s share price on the day the attendance went public. Interestingly, Facebook imposed stricter-than-normal restrictions that prevented the sale of another 1.66 billion portions through mid-2013. All told, Facebook’s atypical lock-up policy released insider shares at five divergent dates.
The public can learn about a company’s lock-up period(s) in its S-1 filing with the SEC; subsequent S-1As will announce any modulations to the lock-up period(s).