If you own pre-IPO shares in your company, you will most likely be subject to a lockup period immediately following its IPO. A lockup period is a window during which company insiders like employees and executives are prohibited from selling their shares. Typically required by the underwriting contract, the lockup period often lasts 180 days but may be shorter or longer. This can make employees anxious as they watch price fluctuations and wonder when they’ll be able to cash in on their investments. Here are answers to questions that pre-IPO investors often ask about the lockup period.
Why can’t I sell my shares right away?
Lockup periods aren’t arbitrary, and they’re not intended to make you sweat. On the contrary, they help protect the value of your pre-IPO investment by helping to stabilize your company’s share price following its debut on the public market. If employees were allowed to dump all their shares on IPO day, this could flood the market, which, on its own, could have a devastating effect on share price. Additionally, however, it sends a signal that insiders are not optimistic about the future of the company, which can further undermine its public image and, in turn, the market value of its stock.
The lockup period serves other purposes, as well. It keeps capital in the company, giving it more fuel to grow and innovate—a big reason companies pursue IPO in the first place. Lockup also protects a company’s new public investors by preventing unethical executives from artificially inflating the share price with the intention of unloading their investments at IPO. A lockup period gives the public market several months in which to determine a fair price for a company’s stock without the disruption of insiders selling their shares.
What do lockup agreements require?
The exact terms of lockup agreements vary from one contract to the next and depending on how the company is making its public debut. The Securities and Exchange Commission (SEC) doesn’t require lockup periods, but underwriters typically do, as do the laws of some states. If a lockup period is used, then its terms must be disclosed in the company’s S-1. Below are a couple of factors that can have a substantial effect on lockup terms.
SPAC Acquisitions
As mentioned above, most lockup agreements prohibit employees from selling their shares for six months after public trading begins. If a company makes its debut via a special purpose acquisition company (SPAC) rather than IPO, however, the lockup period could be in effect for six months to a year. On the other hand, existing shareholders own some of the shares that a SPAC purchases when acquiring a company to take public, and some of these shares may immediately become liquid upon acquisition.
Multiple Lockups
Sometimes, an IPO will involve multiple lockup periods with different expiration dates, allowing different groups of people to sell shares at different times. This is more likely when a company is large and a substantial proportion of its stock is held by its own executives.
What happens when the lockup period ends?
After the lockup period expires, your ability to sell may be limited blackout periods and trading windows. Blackout periods prohibit those who have material, nonpublic information about a company from trading it shares during particular timeframes. Trading windows, conversely, are times during which company insiders may buy and sell shares freely.
How can I make sure I can sell my shares?
After the lockup period expires, you can protect your ability to sell shares of your company stock by establishing a 10b5-1 trading plan. This is a contract that you enter into while you do not have material, nonpublic information about your company, which spells out prescheduled stock trades. By scheduling trades when you don’t have insider information, you gain the ability to sell shares even during blackout periods while avoiding any appearance of insider trading.
How should I navigate all these trading rules?
The IPO or SPAC process can be long, complex, and fraught with pitfalls. Enlisting a team of experts to guide you through it will help you protect your investments as well as avoid running afoul of trading regulations or incurring a shockingly high tax bill. At WRP, we specialize in helping employees like you make the most of the once-in-a-lifetime opportunity that your company’s public offering brings. For more IPO tips, subscribe to our blog!