IPO Basics: What is lockup period and its expiration?
In this article, we will introduce what are the IPO lock-up period and its expiration.
IPO lock-up period
A lock-up period on an IPO is a window of time when early investors and company insiders are not allowed to sell shares. It is set to prevent the market from being flooded with too much supply of a company's stock after the IPO immediately and stabilize the stock price.
When a privately held company begins the process of going public, key employees may receive reduced cash compensation in exchange for shares of the company's stock. Many of these employees as well as early investors may want to cash in their shares as quickly as possible after the company goes public if there are no limits. The lock-up period prevents stock from being sold immediately after the IPO which will appear the business is not worth investing in, and result in stock prices and demand going down.
It should be noted that lock-up periods are not mandated by the United States Securities and Exchange Commission or any other regulatory body. Rather, lock-up periods are either self-imposed by the company going public, or they are required by the investment bank underwriting the IPO request.
Lock-up periods usually last between 90 to 180 days. Some companies have special restrictions.
Take Snowflake's lock-up period as an example, the company makes its restricted share eligible for sale in stages, at appropriate times, according to its prospectus.
IPO lockup expiration
Once the lock-up period ends, which also called expiration, most trading restrictions are removed.
As the lock-up expiration date nears, traders often anticipate a price drop due to the additional supply of shares that are available to the market. The anticipation of a price drop can result in an increase in short interest as traders short-sell stock into the expiration. Investors that are concerned about the upcoming lock-up expiration may try to collar or hedge their long positions with options.
While stocks tend to sell-off ahead of a lock-up expiration, they don't necessarily continue the selling pressure in all cases. If the pre-expiration sell-off is too dramatic, it can often cause a short squeeze on expiration day as short-sellers look to cover their shares with hopes to lock in profits or cut losses.
Source: Investopedia
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
Read more
Comment
Sign in to post a comment
Moomoo Official Account
Let’s learn how to trade with moomoo!
Check out my tutorial.
46KFollowers
140Following
18KVisitors
Follow
汪汪呢称 : Didn’t know there’s a clause on lock up period - good for the reminder
foochoon : Great
win 11118 : Nice
Mishka David Snyder : wow
102849503 : I would proposed a read up next to the learn now button in the front page A timer to keep track of the leaner reading. it can also tell the reader how much time is needed to complete this srticle
102129226 DL : Make sense..
DeeOnlyWant : Good information
KAR7777 : Good
Elements : Good
Cyonara : Awesome
View more comments...