A:

An initial public offering (IPO) lock-up period is a contractual restriction that prevents insiders who are holding a company's stock, before it goes public, from selling the stock for a period usually lasting 90 to 180 days after the company goes public. Insiders include company founders, owners, managers, employees and venture capitalists.

The purpose of an IPO lock-up period is to prevent the market from being flooded with a large number of shares, which would depress the stock's price. Insiders' selling activities can have a particularly strong impact on a company's share price when the company has recently gone public because these stockholders typically own a relatively large percentage of the company's shares, while only a small percentage of shares are sold to the public.

Another reason for the lock-up period is that large sales by those closest to the company can give the appearance of a lack of faith in the company's prospects, even when insiders simply want to cash in long-anticipated profits. It is common for a company's stock price to drop permanently when the lock-up period ends and for its trading volume to increase substantially.

Sometimes insiders cannot sell their shares even when the lock-up period expires because they possess material, nonpublic information and a sale would constitute insider trading. Such a scenario might occur, for example, if the end of the lock up coincided with earnings season.

The Securities and Exchange Commission does not require companies that are going public to have a lock-up period. Rather, the lock-up period is something that the companies themselves and/or the investment banks underwriting the IPO request to keep the stock's price up.

For example, Facebook's IPO lock up prevented the sale of 271 million shares during the company's first three months of public ownership. FB hit an all-time low of $19.69 the day its first lock-up period ended, a price about 50% lower than the share price on the day the company went public. Further restrictions prevented the sale of another 1.66 billion shares through mid-2013. Facebook's unusual lock-up policy released insider shares at five different 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 changes to the lock-up period(s).

RELATED FAQS
  1. What's the difference between insider trading and insider information?

    Learn about insider information and insider trading and the differences between the two; both involve nonpublic information ... Read Answer >>
  2. What exactly is insider trading?

    An "insider" is any person who possesses at least one of the following: 1) access to valuable non-public information about ... Read Answer >>
  3. What is the difference between an IPO and a seasoned issue?

    Learn how companies issue IPO securities when they first go public and seasoned issue shares if they sell more shares in ... Read Answer >>
  4. What are the advantages and disadvantages for a company going public?

    An initial public offering (IPO) is the first sale of stock by a company. Small companies looking to further the growth of ... Read Answer >>
  5. How do corporate actions affect floating stock?

    Learn what floating stock is, and find out about some of the actions a company may take to affect the amount of the company's ... Read Answer >>
Related Articles
  1. Insurance

    5 Tips For Investing In IPOs

    It’s not easy to profit from IPO​s, but the money is there.
  2. Trading

    Snapchat's (Possible) Future in 2 Charts

    What do Facebook and Twitter's stock charts tell us about Snapchat's potential over the coming months?
  3. Personal Finance

    Buy Stock With Insiders: How To Track Insider Buying

    Insider buying can be a sign that a company's stock prices will soon rise. Here's how to keep track of insider buying on public databases and websites.
  4. Investing

    Why Square Stock Plunged 31% Last Week (SQ)

    Investors were spooked not only by Square's wider Q1 loss, but the company's second quarter forecast of merely in-line results.
  5. Financial Advisor

    Company Insiders Aren’t Buying Stock: Should You?

    Purchases of company stock by insiders is on the decline. Is this a warning sign?
  6. Investing

    What's a Secondary Offering?

    A secondary offering is the issuance of new stock from a company that has already made its initial public offering.
  7. Personal Finance

    Insider Selling Isn't Always A Bad Sign

    Predated trades at regular intervals can instill confidence, not fear, for investors.
  8. Insights

    Why Insider Trading Is Bad for Financial Markets

    Insider trading can come in many forms, some of them even legal, with the benefits and costs often debated by practitioners and academics alike.
RELATED TERMS
  1. Close Period

    The time period between the completion of a listed company's ...
  2. Insider Buying

    The purchase of shares of stock in a corporation by someone who ...
  3. Going Public

    The process of selling shares that were formerly privately held ...
  4. Public Company

    A company that has issued securities through an initial public ...
  5. Public Offering Price - POP

    The price at which new issues of stock are offered to the public ...
  6. Open-Market Transaction

    An order placed by an insider, after all appropriate documentation ...
Hot Definitions
  1. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  2. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  3. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  4. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  5. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  6. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
Trading Center