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 exactly is a company's float?

    The term "float" refers to the regular shares that a company has issued to the public that are available for investors to ... Read Answer >>
  2. What are the advantages and disadvantages for a company going public?

    Companies often use an initial public offering (IPO) as a way to generate capital. There are both advantages and disadvantages ... Read Answer >>
Related Articles
  1. Insurance

    IPO Lock-Ups Stop Insider Selling

    Ownership plays a key role when companies go public. Find out how.
  2. Trading

    Snap Stock Falls to Fresh Lows – Is It Oversold?

    The company continues to struggle with meeting analyst expectations and dealing with share lock-up expirations.
  3. Investing

    Snap Inc. Shares Could Fall With Lockup Expiration

    A lockup for some 1.2 billion shares expires later in the summer, setting the stage for declines.
  4. Insights

    The Ups and Downs of Initial Public Offerings

    Learn why initial public offerings (IPOs) aren't the best option for every company. Find out factors to consider before going public.
  5. Trading

    What Investors Can Learn From Insider Trading

    Some insider trading is actually legal - and can be extremely telling for investors.
  6. 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.
  7. Trading

    Can Insiders Help You Make Better Trades?

    Find out why the trading activity of owners and executives can be a valuable trade-confirmation tool.
  8. Investing

    Snap Founders Lose Net Worth on Stock Decline

    Snap's stock has been on the decline, erasing about a third of the co-founders' net worths.
  9. 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.
  10. Investing

    Short Sellers Taste Profits As Roku Plunges

    Roku stock went into freefall after Morgan Stanley downgraded it, but the drop will likely continue.
RELATED TERMS
  1. Freed Up

    Freed up is slang referring to when IPO underwriters are no longer ...
  2. Lockdown

    A lockdown is a specified period when an employee of a public ...
  3. Market Standoff Agreement

    A market standoff agreement prevents company insiders from selling ...
  4. Close Period

    The close period is the time between the completion of a listed ...
  5. Insider

    An insider is a director or senior officer of a company, as well ...
  6. Insider Information

    Insider information is a non-public fact regarding the plans ...
Trading Center