DEFINITION of 'Lockdown'

A lockdown, at times also referred to as a lockup, is a specified period when an employee of a public company is barred from selling, and occasionally buying, his company's stock. These types of equity transaction restrictions can be imposed by securities regulators or underwriting firms if a company has recently issued public securities. They can also be self-imposed by a corporation as an impetus for employees to retain company stock.

BREAKING DOWN 'Lockdown'

One common situation that may involve an employee experiencing a lockdown is in regards to the company-sponsored retirement plan. The lockdown may prevent any changes from being made to the composition of the plan, including the inability to buy or sell any company stock provided as an employment benefit.

Situations Leading to a Lockdown

A company may institute a lockdown of any employee stock-related benefits during two primary scenarios. The first involves a time when major changes may be taking place in how the retirement or stock benefit itself is structured. This allows the transition to take place without the complication of employee cash-outs or trades. The second involves preventing employees from selling shares during a time of internal corporate upheaval.

IPO Lockup

During certain events, a person may be required to enter into a lockup agreement. This legally binding contract states the holder of the asset will not sell until a specified period of time has transpired. When dealing with an IPO, the restriction prevents stakeholders from selling their shares or interest in the company for a time period. This is due to the nature of the risk surrounding an IPO.

During the initial period of availability, the restriction of stakeholder sales helps provide a level of stability or security to the company at large as a certain number of shares will remain with the originating company. This also helps ensure no other organization can purchase a majority share into the company and, therefore, have the ability to hold larger influence over the entity than the original stakeholders. The most common lengths of restriction are 90 or 180 days.

Other 90-Day Restrictions

Ninety-day restrictions may also be incurred by day traders violating certain regulations. This can include failure to hold certain assets for a minimum time period prior to selling, specifically when dealing with cash accounts. For the purchasing transaction to complete, a traditional waiting period of three days must transpire before the same asset can be sold. If the trader attempts to sell the shares sooner, it is considered to fall into the free-ride category and can lead to a 90-day restriction.

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