Lock-Up Period
Categories: IPO
See: 144a. See: Lock-Up Provision.
The period in which an insider is locked up is the lock-up period, usually 6 months and change for normal IPOs.
Regulators make this provision so that vastly-more-knowledgeable insiders can't just dump their shares at a high price, run for the hills, and leave Joe Public holding the bag with shares she paid $30 a share for...trading 6 months later for $10.
This phenomenon also happens when too much oatmeal is consumed. We suggest prunes.
Related or Semi-related Video
Finance: What is a Lock Up Agreement?3 Views
Finance allah shmoop what is ah lock up agreement Okay
You invested your dough in the original round of this
venture capital like investment or you're a founder whose entire
network lives in the form of stock in your hot
little new company Dot com you sold a portion of
it to the public earlier in your aipo raising a
big fat pot of money for you to go spend
opening new sales channels in china Uzbekistanian and somalia Yeah
good luck with that So now you're desperate to sell
some percentage of your holdings You've been dying to buy
that new tesla suv with the gullwing doors and you
know self make upping feature But you can't buy it
Why Well because your locked up and it's nothing prunes
will solve You signed a contractual agreement when you did
the original handshake with the investment bankers who were taking
you public You agreed that you would follow what are
called the one forty four a laws which restrict insiders
from selling any shares until to quarters and change have
fast during which a company is newly public Well why
do these laws even exist Well because a bunch of
scummy city slickers screwed over a bunch of uneducated farmers
in a bygone era such that the government had to
step in and make everyone play fair and square like
they dumped their shares the minute the company was public
on unsuspecting farmers who paid eighty seven dollars share only
to watch the stock trade down to eighty seven cents
a share two years later or even less Yeah that
happened right Well the general idea here is that if
a company can show professionally audited public Numbers 4:6 months
and change of being a public company well then they
wouldn't have been able to hide something deep dark fraud
like elements about their business that it was all kind
of a shell game against those poor farmers Well everyone
would be playing then on the same level playing field
and it would be fair upon public notice for insiders
to sell some limited percentage of their total holdings and
get liquid well in practice all kinds of restrictions exist
against freeform insider selling so a maximum total percentage owned
per month recorder per year is out there their maximum
ceilings against which total volume can't be certain passed in
a given day like if a million shares trade in
a day you can't sell more than five percent or
fifty thousand shares in a day And a bunch of
other restrictions exist that are designed to mitigate the spread
between information held by insiders and information held by outsiders 00:02:40.645 --> [endTime] Yeah other outsiders