Why Is There an IPO Lockup Period and How Long Does It Last?

Every year, newly public companies release billions of dollars’ worth of insider-held stock onto the market, but not immediately after their initial public offerings (IPOs). This delay is because of the IPO lockup period, a strategic pause typically lasting 90 to 180 days that prevents company insiders from selling their shares immediately after the company goes public.

This contractual limit serves a critical purpose: it prevents a sudden surge of shares from entering the market all at once, which could cause a major drop in the stock price. For example, when the first lockup for Facebook, now Meta Platforms, Inc. (META), expired in 2012, its stock price plummeted about 50% from its IPO price as millions of previously restricted shares became available for trading. Before investing in the next hot IPO, here’s what you need to know about these important waiting periods.

What Is an IPO Lock-Up Period?

An IPO lockup period is a specified period after a company goes public during which certain insiders—employees, company executives, and large shareholders—are prohibited from selling their shares. The restriction is part of a lockup agreement made between the company and its underwriters before the initial public offering (IPO). The main goal is to prevent a sudden flood of shares from insiders hitting the market right after the IPO, which could cause the stock price to drop sharply.

Most IPO lockup periods last about 180 days, or about months, although the exact length can vary. The details of the lockup period, including its duration and any exceptions, must be disclosed in the company’s IPO prospectus, which is filed with the SEC.

For investors, knowing the length of the lockup period is important since that could mean a surge of shares hitting the market, decreasing the stock price.

Purpose of the IPO Lock-Up Period

The main reason for IPO lockup periods is to prevent company insiders, such as employees, executives, and early investors, from selling a bunch of their shares right after the company goes public. If all these shares were sold at once, it could flood the market and cause the stock price to drop sharply. By temporarily restricting insider sales, the lockup period helps keep the stock price more stable in the first few months after the IPO, giving new investors some protection from sudden price swings.

Lockup periods also help manage the supply and demand for the stock. When fewer shares are available for trading, it can help support the stock price, especially if there is strong demand from the public. Once the lockup period ends, more shares become available, which can sometimes lead to a decrease in the stock price if many insiders decide to sell simultaneously.

Who Is Affected by the Lock-Up Period?

• Company insiders: This covers executives, directors, and other key employees who hold shares in the company.
• Founders: The original creators of the company, who often own a significant portion of shares.
• Employees: Many employees receive shares or stock options as part of their compensation, and these are typically subject to lockup restrictions.
• Early investors: This group includes venture capitalists, large shareholders, and occasionally friends and family who invested in the company before the IPO.

The details of who is subject to the lockup and for how long are disclosed in the company’s IPO prospectus, which is filed with the SEC.

SPAC Lock-Ups

For SPACs, the lockup periods are often longer. After a SPAC goes public, it generally has a two-year time frame to identify and complete a merger with a target company, though this period can sometimes be extended up to three years. The shares held by SPAC sponsors and insiders are often subject to restrictions that last for a period of up to about a year after the merger is completed, rather than the standard 180 days used in traditional IPOs.

These extended lockup are designed to align the interests of SPAC sponsors with those of new investors and to maintain market stability as the newly combined entity transitions to public trading.

Regulatory Aspects of Lock-Up Periods

Lockup periods are not required by law or by regulators like the SEC. Instead, they are private agreements typically made between the company going public and its underwriters before the IPO. The primary purpose of lockups is to prevent insiders from selling their shares too soon after the company goes public, which could impact the stock price.

Investment Strategies Related to Lock-Up Periods

• Check the prospectus: Before investing in a recent IPO, review the company’s prospectus to find out if there is a lockup agreement and when it expires. The SEC recommends this step to enable you to make informed decisions about potential price movements around the lockup expiration date.
• Wait for the lockup expiry: A common approach is to wait until after the lockup period has ended before purchasing shares. This is because a company’s stock price may drop when locked-up shares are released and insiders are able to sell, increasing the supply of shares on the market. By waiting, you can buy the stock at a lower price if its value declines after the lockup period expires.
• Monitor early waivers: In recent years, underwriters sometimes allow insiders to sell shares before the official end of the lockup period. This practice, known as a lockup waiver, can lead to earlier-than-expected increases in share supply. Monitoring SEC filings for any such waivers can help you anticipate price changes.
• Understand market trends: Data indicate that a significant number of companies experience a decline in stock price after the lockup period ends, particularly when many insiders decide to sell simultaneously. Understanding this trend can help you plan your entry or exit timing.

The Bottom Line

When a company goes public with an IPO, a lockup period is often in place for about six months. This means that insiders, such as the company’s founders, employees, and initial investors, cannot sell their shares during this period. This is intended to stabilize the stock price by limiting the supply of shares available for trading. For investors considering buying into an IPO, the end of the lockup period could lead to increased selling pressure from insiders, potentially creating a chance to buy shares at a lower price.