Lockup Period: When Insiders Can First Sell After an IPO

Somewhere in the back half of an IPO prospectus, under a heading such as Shares Eligible for Future Sale or Underwriting, sits a paragraph that is easy to skip on the way to the financial statements. It says that the company’s officers, directors and most existing shareholders have signed agreements with the underwriters promising not to sell, pledge or otherwise dispose of their shares for a set number of days after the listing. That number is often around 180, roughly six months. The paragraph then lists exceptions, and those matter as much as the length.

What the agreement does

A newly listed company has two groups of shareholders. One bought in the offering. The other owned shares before it: founders, employees and funds. The lockup keeps the second group out of the market for a while, which gives trading time to settle before a large block of stock can arrive.

The agreement is with the underwriters. It is a contract. No securities rule fixes its length. Terms differ by deal.

Sizing the shares released at expiry

Compare the shares about to be freed with the shares already trading.

On expiry day, in this hypothetical, the pool of shares that may be sold is four times the float that has been trading since the listing. Even if only a quarter of the locked holders sell, that is 20 million shares, as much as the whole offering, arriving in a market that has only ever had to absorb 20 million. That arithmetic is why traders watch the date.

A smaller release carries less weight. With 10 million locked against a 20 million float, expiry adds half the float.

What expiry permits

Expiry gives holders permission to sell. Whether they use it is up to them. The prospectus cannot tell you. A founder may hold for years. A venture fund near the end of its life may hand shares out to its own investors, who then decide for themselves. Employees may sell to pay taxes on stock they received.

Some holders stay restricted after the lockup ends. Officers, directors and large shareholders who count as affiliates sell under the conditions of the SEC’s Rule 144, which include limits on how much they can sell over a period, and many insiders also face company trading windows around earnings.

Why it matters if you trade the stock

A recent IPO has few scheduled events. Earnings is one and the lockup date is another, and sometimes the two land within days of each other, which stacks a fresh set of numbers on top of a possible jump in the supply of sellable shares. If you hold shares going into it, the question is whether you are comfortable with the possibility of heavy selling on a stock with no long trading history to lean on. If you are thinking of buying, the date is a reason to check the calendar first, and skip the first day of an IPO makes a broader case for patience with new listings.

Recent listings may also be non-marginable for a while. Why a stock isn’t marginable explains why, and the Hands Off the Buy Button course builds a pre-trade filter that includes scheduled events like this one. More on share structure and new listings sits in the stock trading section.

What people get wrong

The first mistake is expecting a crash. What changes on the day is the supply of sellable shares. Another is using the IPO date plus six months without reading the actual agreement, which may count from a different date or release shares in stages. A third is forgetting that some insiders, holding shares outside the lockup or granted a waiver, could sell all along.

Related terms

Public float is the number of shares available to trade. Underwriters are the banks that run the offering and sign the lockup agreements. Rule 144 is the SEC rule for resales by affiliates.