Page 124 - Initial Public Offering - An Introduction to IPO on Wall Street

The underwriter utilizes the option by purchasing the market shares back and offering them at
an elevated price to its issuer. When the market for their shares is either growing or declining,
businesses use this strategy to stabilize their stock prices.

Lock-up Period

Anyone who has already owned
stock could cash out when a
business goes public. Those
stocks can, however, only be
sold after a lock-up period. A
lock-up period refers to the
specified period in which,
following an initial public
offering (IPO), employees,
investors, and business insiders
are not permitted to redeem or
sell their stock. This typically
arises in situations where a
private company makes the
initial offering of public stock.

Although the waiting period will vary according to the business and circumstances, the lock-
up period is generally between 80 and 190 days. Investors should also remember that for
specific purpose acquisition firm (SPAC) IPOs, the lock-up duration is typically longer.
Usually, lockups for SPAC IPOs last for 180 days to a year.

A lock-up period is intended to avoid insiders and early investors from selling their shares for
a fixed period after an initial public offering (IPO) is completed by a firm, helping to reduce
selling pressure in the early periods of existence as a publicly listed organization.

In general, lock-up periods apply to insiders, such as the employees, managers, owners, and
founders of an organization. It can, however, sometimes apply to early private investors such
as venture capitalists as well.
Reasons for IPO Lock-up Periods

The main aim of an IPO lock-up period is to prevent large investors from overwhelming the
stock market, which would weaken the price of the stock initially.

In simple terms, the insiders of businesses tend to own unreasonably high percentages of equity
shares relative to the general public. As a result, these high-volume sale activities may
dramatically affect the share price of a business right after it goes public.
Lock-up periods may also remove the impression of a lack of confidence in the business’s
future displayed by those closest to it. Insiders often merely want to cash in on long-anticipated
gains. Unfortunately, for no valid purpose, that could generate false impressions that negatively
affect the business.

After the lock-up period ends, insiders may still be unable to sell their stock. This can happen
if an insider has access to material, non-public data, where insider trading will legally entail
the selling of securities. If the conclusion of the lock-up period coincided with the revenue
generation season, such a situation might occur.

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