If you have pre-IPO shares of your company’s stock, you may be wondering when you’ll be able to cash in. Here are the basics you should know about the IPO lockup period and the importance of planning ahead for share sales.
What is an IPO lockup period?
A lockup period is a period of time during which IPO insiders are prohibited from selling shares of company stock. While a lockup period isn’t mandated by the Securities and Exchange Commission (SEC) or any other regulatory body, it is typically included as a contract provision between insiders and underwriters of pre-IPO companies.
Why do lockup periods exist?
Companies and their banks that underwrite them subject insiders to lockup periods primarily to protect the companies’ stock value. If high numbers of insiders were to sell a stock immediately after IPO, this sudden flood of shares could cause the price to plummet. It could also create a public perception that insiders lack faith in the company, further undermining its share price. On the other side of the equation, lockup periods help to protect public investors by preventing ill-intentioned executives from inflating the stock price just to unload their shares at IPO.
How long is the lockup period?
It’s common for lockup periods to last six months, but they can be shorter or longer. Standard lockup periods often range from three to six months, while lockup periods for SPACs typically last six months to a year.
Can I sell my shares as soon as the lockup period expires?
The lockup period is only the first hurdle a company insider needs to clear before selling their shares. Trading windows and blackout periods often restrict when those holding nonpublic information may sell company stock. This can be frustrating for those who are anxious to cash in on their company’s success, particularly if they’ve taken out loans to exercise their stock options.
You may be able to avoid many of these restrictions, however. By developing a 10b5-1 trading plan, you can preschedule sales of your shares. Setting out this trading schedule at a time when you’re not privy to material non-public information can allow you to sell shares in the future while avoiding any appearance of insider trading.
The road to your company’s IPO can be long and complex. WRP provides expert financial guidance for employees and executives throughout the IPO process, from early decisions such as when to exercise stock options to retirement and estate planning. To see more of our articles about navigating the IPO process and other financial planning topics, check out our blog!