What Does Lockdown Mean?

A lockdown, also known as a lockup, is a period of time in which holders of a company’s stock are restricted from selling their shares.

Lockdown restrictions are typically put in place in anticipation of a company’s initial public offering (IPO). They generally affect company insiders such as founders, executives, and early investors.

Key Takeaways

  • A lockdown is a period of time in which holders of a company’s stock are restricted from selling their shares.
  • Lockdown periods typically last 90 or 180 days. While they are not mandatory, they are often requested by IPO underwriters.
  • Lockdown periods are put in place to protect companies from excessive selling pressure following their IPO.
  • The period following the expiration of the lockdown can be volatile, as old investors sell shares and new investors take their place.

How Lockdowns Work

Lockdown periods are an important part of the IPO process. Company insiders are often eager to sell their shares following an IPO to cash out on their investment. However, too much selling pressure could frighten new investors who may interpret it as a lack of faith in the company’s future prospects.

Lockdown periods are a compromise solution that requires insiders to wait, typically for 90 or 180 days, before selling their shares. Although lockdown periods are not required by law, they are frequently requested by underwriters who want to ensure a successful IPO.

Because underwriters often insist that a lockdown period be followed, investors should understand that the lack of selling by insiders during the lockdown period does not necessarily indicate that they are confident in the future of the company. They may wish to sell but are temporarily prevented from doing so.

The end of the lockdown period can be a turbulent period for investors, because it is often associated with increased trading volume. Insiders who are finally free to sell their shares may do so, putting downward pressure on the share price.

At the same time, new investors who feel confident in the prospects of the company might take this opportunity to purchase shares at relatively low prices. For some investors, such as pension funds and other institutional buyers, this increase in liquidity may make the company more attractive.

Real World Example of a Lockdown

A notable example of a lockdown period is that of Facebook (FB), which completed its IPO in May of 2012 at a price of $38 per share. Facebook’s IPO included a 180-day lockdown period which ended in November 2012.

The company’s shares declined to below $20 per share shortly after its IPO, but rose above its $38 offer price in the months following the expiration of its lockdown period. The share price then rose steadily over the following years, reaching $190 per share in September 2019.

Although many insiders sold shares in Facebook following the end of the lockdown period, new retail and institutional investors quickly took their place. In December 2013, Standard & Poor’s (S&P) announced that Facebook would be included in the S&P 500 index. This announcement further supported the continued rise of its share price by making the shares accessible to exchange-traded funds (ETFs) and other investment vehicles linked to the S&P 500 index.