PostHeaderIcon Investors and IPO Lockups

From the word itself, lockups occur when the shares of company insiders are "locked up." Lockup agreements prohibit employees, venture capitalists, and family and friends from selling their shares for a given time period. Typically, the company and its underwriter enter into a lockup agreement before the company goes public. This is to ensure that the insiders’ shares would not enter the market too soon after the initial offering.

Most lockup agreements prevent insiders from accessing their shares usually for a period of 180 days, but these may vary depending on the company situation. The number of shares that can be sold over a selected time period are also limited by lockups.

When considering investing in a company that has recently undergone an initial public offering, determine if the company is under a lockup and know when it expires. This is crucial because the company’s stock price may be affected when anticipating the lockup shares being sold into the market before and after the lockup ends. The stock that is valued at these agreements can be large enough, that is why potential sales level upon expiration should be a major consideration among public shareholders.

The existence of lockup agreements also somehow drives a wedge between the interests of the insiders and investors. Share values are enhanced by lockup agreements as investors believe that any negative information will most likely be revealed before the expiration. As such, investors would continue to hold a large stake in the company and align their interests with those of the shareholders. But recognizing the existence of lockup agreements does not necessarily close the information gap between insiders and outsiders. Insiders could withhold negative information during the lockup period prompting investors to feel anxious about selling towards the expiration date.

Nearing the lockup date does not imply that there is large selling of stocks by investors. Shares of IPO do better during the days directly before and after the lockup expiration. This is the time when shareholders feel certain about the future actions of insiders. But having fewer opportunities to indicate firm values and with the added concern for investors handling large amounts of stock, companies having high shares in locked-up stocks face negative market reactions. The ownership of venture capitalists who are more likely to sell their shares than their managers also impacts the price negatively.

Meanwhile unit issues, where the IPO issuer collects a share offer with warrants in one single unit, come out better in comparison. In this case, continued ownership is important. Investors believe that insiders would have an incentive to continue their commitment with the firm. They also feel more confident knowing there is management commitment to the company, by way of the insiders retaining a high degree of ownership after the offer has been made. Large firms also fare better than small firms, as investors generally have more information about them.


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