Concept

An overwhelmingly large proportion of initial public offerings (IPOs) report lock-up provisions that prohibit existing stockholders from selling their shares within a specified period after the offering date. These lock-up periods may last as long as 180 days. Because influential buyers request the lock-up, we conjecture that the length conveys credible information pertinent to the risk of the IPO. the various legal issue arising during a Lockup period in IPO & how do you trade it lets discuss it below.

What is lockup period?

Lockup period is also called locked-up, lock-in or lock-out period refers to the predetermined time frame in which corporate insiders, investors, and employees are not allowed to sell or redeem their shares after an IPO. The management and initial large stock holders of publicly treated company are forbidden to sell their shares immediately following an IPO. The law usually does not oblige business that want to go public to follow lockup period. The purpose is to prevent excessive volatility and allow the market to find the stocks true value.

How Long is a Lockup Period?

The lockup period is usually 90-180 days depending on the company. Although lockups used to be fairly simple typically lasting 180 days, they are gradually becoming more complex. Investors and employees usually want lockup that are shorter so that they can cash out earlier.

What is the Purpose of an IPO Lockup period?

A company usually brings in more money when the price and demand for the stock are up. When a private entity goes public, many key employees usually want to cash in their stock as quickly as possible. The main purpose of an IPO lock-up period is to prevent flooding of the market with too many shares, which will lower the stock’s price.

What are the legal issues arising in Lockup Periods?

  • Shortening of Lock-up Period stand to a market Manipulation:

    When the company altered and misrepresented financial statements to inflate its stock price, it went bankrupt and multiple executives were indicted for the fraud. Here are the ways to stop market manipulation. Understand your risk appetite and ensure you have an exit strategy for your investments, verify claims that seem too good to be true, avoid excessively large bids or “limited time offers” and review your account activity on a regular basis and report any suspicious activity in your account.

  • Misleading or Deceptive Leading to potential legal claims (Fraud):

    Ensure all communications about changes to the lock-up period are accurate and complete. This includes press releases, financial reports, and investor presentations. Provide education and resources to investors about the implications of lock-up period changes and the associated risks. This can help manage expectations and reduce the likelihood of misunderstandings. Perform regular risk assessments to identify and mitigate potential legal risks associated with changes to lock-up periods. Promote a strong ethical culture within the organization, emphasizing the importance of honesty and integrity in all financial communications and transactions. Consult with legal advisors specializing in securities law to ensure that all actions related to lock-up periods comply with applicable laws and regulations. Develop a legal strategy to address any potential claims or disputes that may arise from changes to lock-up periods.

  • Company Reputation and Relationship with future Investors and Underwriters:

    All lock-up agreements reviewed by legal experts to ensure compliance with relevant regulations and to identify potential issues early. Develop systems to monitor compliance with lock-up agreements and other contractual obligations. Conduct regular audits to ensure adherence to lock-up terms and identify any potential risks. This includes strategies for quick resolution and communication. Inform investors, underwriters, and regulators about any potential changes to the lock-up period well in advance. Strengthen Investor Relations provide assurances about the company’s commitment to ethical practices, transparency, and regulatory compliance. Working with underwriters’ transparent negotiations discuss any changes to the lock-up period with underwriters before they are finalized. Legal Counsel Work with legal experts to navigate any potential legal issues related to the lock-up period and to ensure compliance with all contractual obligations. Enhancing corporate governance practices to ensure better oversight and adherence to lock-up agreements and other contractual obligations.

Conclusion

An IPO lock-up period is a contractual constraint that inhibits business insiders holding stock before the company goes public from selling their stock for a period. Such Insiders may include company owners, founders, employees, managers, and venture capitalists.  The investment stays safe during the lock in period, untouched by market fluctuations. The purpose of lockups is to stop corporate insiders from hastily liquidating assets after the company’s IPO. It helps ensure that the stock price will not decline from a sudden flood of selling.