DEFINITION of Lockdown
A lockdown, 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 keep company stock.
BREAKING DOWN Lockdown
One common situation that may involve an employee experiencing a lockdown is regarding 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 and IPO Lockup
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 take place in the structure of the retirement or stock benefit. 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.
During certain events, the company may require a person to enter a lockup agreement. This legally binding contract states the holder of the asset will not sell until a specified period has transpired. When dealing with an IPO, the restriction prevents stakeholders from selling their shares or interest in the company for a period. This is due to 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, 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
Day traders who violate certain regulations may also incur 90-day restrictions. This can include failure to hold certain assets for a minimum time period before selling, specifically when dealing with cash accounts. For the purchasing transaction to complete, a traditional waiting period of three days must transpire before the trader can sell the same asset. If the trader tries to sell the shares sooner, it falls into the free-ride category and can lead to a 90-day restriction.