IPO Lockup Periods in Plain Words

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This page is general information, not financial advice.

What a lockup agreement is

Investor.gov, in its glossary page “Initial Public Offerings: Lockup Agreements,” states:

“Lockup agreements prohibit company insiders—including employees, their friends and family, and large shareholders—from selling their shares for a set period of time after an IPO. In other words, the shares are ‘locked up.’”

The same page also states:

“Before a company goes public, the company insiders and its underwriter typically enter into a lockup agreement to ensure that shares owned by these insiders don’t enter the public market too soon after the offering.”

In plain words: the agreement is made before the company goes public. It is made by the company insiders and its underwriter. Its stated aim is to keep insider shares out of the public market too soon after the offering.

Who is barred from selling

As the glossary page words it, the people barred are company insiders. That includes:

• employees,
• their friends and family, and
• large shareholders.

That list is the glossary page’s list. This page does not add other groups to it.

How long most lockups run

The glossary page states:

“The terms of lockup agreements may vary, but most prevent insiders from selling their shares for 180 days.”

The Investor.gov bulletin “Updated Investor Bulletin: Investing in an IPO” says the same length in its own words. It says existing shareholders have entered into a lock-up agreement “in which they agree not to sell their shares for a certain period of time, typically 180 days.”

Both sources say 180 days. One says “most.” The other says “typically.” There is no conflict between them on this point.

This page gives no expiry date for any real company. A lockup date for one company does not tell you the date for another, because terms may vary.

Terms vary, and a lockup may limit how many shares can be sold

The glossary page states:

“Lockups also may limit the number of shares that can be sold over a designated period of time.”

In plain words: a lockup may do more than set one end date. It may also limit the number of shares that can be sold over a set period.

Where the terms must be disclosed

The glossary page states:

“U.S. securities laws require a company using a lockup to disclose the terms in its registration documents, including its prospectus.”

In plain words: if a company uses a lockup, the terms must be shown in its registration documents. The prospectus is one of those documents.

The glossary page also states:

“To find out whether a company has a lockup agreement, review the company’s IPO prospectus. You can find the prospectus online through the SEC’s EDGAR database.”

So, to check a lockup, read the company’s IPO prospectus. You can find the prospectus online through the SEC’s EDGAR database.

What can happen to the price when a lockup ends

The two sources say related things. Each is printed here with its own source named. They are not merged into one claim.

The glossary page states:

“If you are considering investing in a company that has recently conducted an initial public offering, you should determine whether the company insiders have a lockup and when it expires. This is important information because a company’s stock price may drop in anticipation that locked up shares will be sold into the market when the lockup ends.”

In plain words, from that page: the price may drop ahead of the end of a lockup, in anticipation that locked up shares will be sold when the lockup ends. The page says “may drop.” It does not say the price will drop.

Market overhang, as the bulletin explains it

The bulletin uses the term “market overhang.” It states:

“The number of shares that are outstanding but cannot be traded at the time of the IPO is sometimes referred to as the ‘market overhang.’”

The bulletin then states:

“The share price after an IPO may decline over time as shares that were previously restricted become available for sale. In addition, when lock-up agreements expire, the share price may decline significantly if a large number of shares become available for sale all at once.”

In plain words: shares that could not be traded may later become available for sale. When a lockup expires, a large number of shares may become available all at once. The bulletin says the share price may decline, and may decline significantly in that case. It says “may.” It does not say the price will decline.

The bulletin also explains why early holders may want to sell. It states:

“Early investors and shareholders in a company often view an IPO as an exit strategy—a way to realize a profit on their investment by being able to sell shares to the public. The lock-up expirations give these early investors the opportunity to sell their shares to the extent they weren’t able to do so as selling shareholders in the IPO.”

Where to find the market overhang in the prospectus

The bulletin states:

“An investor can discover the extent of a company’s market overhang in the IPO prospectus. A company must discuss the shares that it has agreed to register for sale or that will be available for sale without registration following the IPO. This disclosure can typically be found under Shares Eligible for Future Sale or a similar caption.”

In plain words: look in the IPO prospectus. Look for a section called Shares Eligible for Future Sale, or a similar heading.

Words to know

• IPO: Initial public offering. The glossary page and the bulletin both use it for when a company first offers its shares to the public.
• Insiders: As the glossary page words it, company insiders include employees, their friends and family, and large shareholders.
• Lockup agreement: An agreement that prohibits those insiders from selling their shares for a set period of time after an IPO.
• Prospectus: The offering document. The bulletin describes it as the document describing the company, the IPO terms, and other information an investor may use when deciding whether to invest.
• Market overhang: As the bulletin words it, the number of shares that are outstanding but cannot be traded at the time of the IPO.
• EDGAR: The SEC database where, as the glossary page states, you can find the prospectus online.

What this page does not do

• It does not predict an expiry date for any real company.
• It does not name any product.
• It does not recommend buying, selling, or holding any share.
• It prints only what the two official sources below state about lockups and market overhang.

This page is general information, not financial advice.