IPO Lockup Period – Concept, Purpose, Example, Expiry, Benefits & more
IPO Lockup Period plays an integral role during the IPO process. People also name Lockup period as the lock-in or lock-out period, so make sure you are aware of that.
Taking advantage of the IPO Lock-up period, companies restrict investors from selling any of their purchased shares too soon.
What is IPO Lockup Period?
To simply put, this terminology mitigates the selling pressure in the premature stage of Initial Public offering.
Right after the end of the IPO process, no investor, employee, or any insider is allowed to sell the shares.
As we all know, IPO is a process through which privately-owned companies become public corporations and enter the stock markets.
Since these companies aren’t yet in a well-established position in the open market, the Lockup period works as a supportive gear for them.
There’s no wonder that entering via IPO in the stock market can be slightly challenging in the absence of a Lockup period.
Investors wish for a short Lockup period, mainly short-term traders, so they could cash out as early as possible.
This may lead to a significant fall in the share prices. That’s where we realize the value of the Lockup period.
Companies’ opinions with IPO Lock-up period are also two fold. They want that investors could feel satisfied with the returns.
At the same time, they also don’t want that the increasing sales of its shares not to influence new traders’ decisions for investments. This may contribute to a lack of faith in the company.
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The Purpose of Lockup Period in IPO
IPO Lockup period aims to stop the market flooding, which is known to reduce the shares’ prices. It puts a stop on stock’s supply so the company could stay in a balanced position.
Usually, companies issue only 20% of their shares in the stock market.
Another big concern is that every privately-owned company entering the stock market doesn’t carry enough capital compared to other public co-operations.
This may force such companies to run into big financial trouble. Let’s understand it more deeply through an example to know everything about the Lockup period in IPO.
IPO Lockup Period Example
XYZ issues 20% of its shares to the public via IPO. Accordingly, if an investor or a group of investors unload an excellent amount of holding right after the IPO ends, the company may experience a significant loss.
Analysts share opinions that companies are more likely to experience a 1% to 3% of a permanent drop in their shares prices even after the end of the Lockup period.
That’s being said, Lockup period solely intends to support the IPO process and ensure a successful entrance to the company that aims to go public.
How long does Lockup Period Last?
The Lockup generally begins from 90 days and lasts to 180 days. Still, this depends upon the company for how long they want it.
But it’s worth mentioning that today’s Lockup periods are relatively more complex than the Lockup period a few decades back.
Underwriter’s bank, which plays a vital role in the early phases of the IPO process, does not consent for a more extended period.
According to them, this may lead to a drop in the share prices by the insider, which isn’t negotiable.
Investors as well seek a short IPO Lock-up period. That’s why companies try to ensure the Lockup period is as short as possible.
Important Consideration on IPO Lockup Expiry Date
Lockup expiring date is undoubtedly the most critical subject. If you are investors and planning to invest in a company entering the open market first time via IPO, here’s an excellent explanation for you.
If a privately owned company has made an Initial Public Offering, make sure you first acknowledge the Lockup period and its expiring date.
Consider this valuable subject earlier, as later you may have to confront a big problem.
Throughout the IPO process, underwriters and insiders may influence the shares prices. Resulting in a significant drop in share value is possible as the Lockup period ends.
However, it doesn’t necessarily happen that share prices go down, even though many companies give us a perfect explanation of share prices.
You might have heard many times that share prices dropped and even collapsed of a particular company by the end of the Lockup Period.
But this doesn’t conclude that investment in such companies isn’t worth it. In most instances, a remarkable surge in companies’ share prices proves that IPO investment can be a great deal.
Moreover, if the price has actually been dropped, it doesn’t mean that you should sell out shares in haste.
There are certain events when prices of shares have made a dramatic peak even after encountering a drastic drop.
The Usefulness of IPO Lock-up Period
There’s no surprise that IPO Lockup period means a lot to a company.
It is quite effective to avoid market flooding as new companies with limited capital may find it hard to deal with the increasing changes in the open market.
They need some space to adapt to the market’s ever-changing patterns conveniently, and the Lockup period gives them the same.
Higher volume trading implies a dramatic rise or drop is likely to come at the share prices.
This particular trait of the market may greatly influence the share prices of new companies compared to other companies.
In a nutshell, the IPO Lockup period stabilizes the market and eliminates any pressure on the company.
This particular principle of IPO gives new companies enough time to use the funds ideally and balancing off their share prices.
Companies and underwriters can reap the benefit of Lockup period together to influence the share prices and draw more investors’ attention.
Also, any closest investor to a company may influence the price of the shares.
But this thing may either trigger a green signal by investing more in a company or a red signal by reducing its share prices which happens if shareowners make an external deal during the IPO process.
IPO Lockup Period – Conclusion
So this is how you may understand the importance and drawbacks of IPO, including the Lockup period.
However, both companies and investors may confront unfortunate or favorable situations after the end of the Lockup period.
But if you are an investor, a smart move may contribute a strong foundation.
Make sure you first understand the market, grasp information about the IPO company, and invest accordingly.
Frequently Asked Questions
Here are few FAQs on IPO Lockup Period –
Can you sell IPO shares immediately?
You may have to pay standard income tax or charges on the profits if you sell the shares on the first day of listing. The condition also implies if you sell shares at any point within the first year.
Yet, it is recommended to try to sell shares after a whole year to avoid tax and charges. Also, it is more likely to happen that the company grows popular within a year and its share value surges.
How long after IPO can you sell?
There is a pre-specified 90 to the 180-day Lockup period in an IPO process during which one can’t sell out a company’s share.
After the 180 days have expired, you must determine whether to sell the purchased stocks or not.
In most instances, it is advisable not to sell in haste as prices may dramatically rise, so have some patience. Keep your eyes on the company’s performance and try to predict the outcomes.
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