An IPO lockup is an agreement signed by those who own shares prior to an IPO (i.e., insiders and early investors). The agreement restricts these shareholders’ abilities to sell shares for a period of time—most https://forexhero.info/roboforex-broker-review/amp/ commonly 180 days. These agreements are not required, except in states that require them via “Blue Sky Laws.”1 Information regarding a company’s IPO lockup restrictions can be found in the IPO prospectus.
The lock-in period for non-promoters is six months and for promoters is 18 months.
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However, they have become an almost de facto standard that is either self-imposed by the company who is launching the initial public offering or is required by the investment bank that is underwriting the IPO. How eager insiders are to sell also depends on how long the company took to reach an IPO from when it was founded, what portion of shares are held by founders versus venture capitalists, and other factors. Before mentally pre-spending your proceeds, keep in mind that sizable windfalls from a company going public don’t happen every day. You are likely on the cusp of a major financial milestone in your life – one that might not repeat itself. That isn’t to say that you cannot – or should not – do something enjoyable with the proceeds.
In general, the goal is to keep the stock price going up after its debut. And once the lockup period ends, stock volume typically increases by 40% and the share price drops by 1-3% on average, according to research by the Stern School of Business at New York University. An IPO lockup period is an often overlooked caveat of initial public offerings.
IPO lockups serve an important purpose in protecting the common investor, hence why they are so demanded. Without the lockup period, many insiders and early investors would sell their shares shortly after the IPO in an effort to gain liquidity. This flood of supply could overwhelm demand, thus depressing the share price, which hurts common investors who recently purchased shares in the expectation that the value would increase. It is a period of time when the management and large shareholders of a publicly traded company are not allowed to sell their shares in the market. Usually following the initial public offering (IPO), the company management and investors are restricted to sell their shares.
In fact, this stipulation is in place to protect everyday investors like you and me. Therefore, let’s take a closer look at a lockup period, what it means and how it works. Although the typical IPO lockup period does not expire until its scheduled day, there are a few circumstances that justify early releases from the agreements. However, these early release provisions usually apply to only a percentage of the locked-up shares or to just a subset of “early release shareholders” rather than to the entire population of insiders. The reason companies choose to do this is to avoid volatility in the stock price and maintain confidence in the company.
But try to strike a balance between your current and future wants and needs. Naturally, the prospect of a large windfall is exciting and the lifestyle improvements tempting. As you wait for the blackout to end, develop a plan before you’re able to sell your stock. Consider the possible tax benefits of spreading sales over one or more tax years versus the risk of holding the shares longer or the tax laws changing in the interim. The IPO process is so detailed that even the most experienced investors have to stay on top of their research.
Avoid making decisions on the go. Restrictions to sell: IPO shares come in within a mandatory lock-in period for six months from the day of allotment. The lock-in period is set to avoid dumping of shares which can cause the market value of the share to fall and create a situation of stock instability.