What is the IPO lock-up period when the shares of a company cannot be sold before a specific date?
The lockdown period is designed to prevent early investors and insiders from selling their shares for a set period after the company completes its initial public offering (IPO), helping to minimize selling pressure in the early life of a publicly-traded business.
Private companies are usually owned by founders, employees, venture capitalists, and private investors. There are two reasons why they make the company public. First, raise money for business development. Second, they can cash out some of their investments to date.
Companies entering the public market decide how many shares to place, but founders or early investors often retain large stakes in the business after an IPO. If one or more of them decide to sell a large number of their shares, this could seriously reduce the share price, which is not in the interests of the company or its investors. Therefore, existing investors are often not allowed to sell their shares for a set period of time after the completion of the IPO, usually 90-180 days.
Ultimately, the lockdown periods are to support the stock price to avoid volatility and to stabilize the stock market in the first months after the listing (IPO).
What happens to the company's share price after the lockdown period expires?
This means that the largest shareholders in the business can only freely sell their shares after the IPO blocking period expires. A flood of new shares can enter the market if the owners of these shares decide to sell them. If the stock price skyrocketed after the IPO, then early investors may want to reap the benefits by selling some of their investments, or if the price has fallen, they can expect to reduce their risk by selling. However, this does not mean that they will sell anyway, as they can count on keeping the stock in the hope that prices will be even higher, or because they believe that the stock can reclaim any value lost in the early days as a public company. Much attention is paid to how the stock price behaves today, compared to the price of stocks that just appeared thanks to the IPO, but it is worth remembering that early investors probably paid significantly less. This means that many early investors will still be able to book profits even if the stock price has declined since the IPO.
The end of the lockdown period sends a strong signal that the largest shareholders are confident in the company's prospects. If institutional investors decide to dump their stock after the lockout period ends, it suggests that they have little confidence that the company's stock is worth holding. If these investors are selling a relatively small number of shares, then this indicates that they want to keep the shares and are optimistic.
Typically, if there is a sharp increase in the number of available shares in a company, this leads to a decrease in the share price. It is not uncommon for a share price to drop on the first day when shares can already be sold by those who do not have a lock [recall that the lock does not apply to all holders]. In fact, if other investors (not eligible for the lockdown period) start selling in the days leading up to the lockdown expiration, it is a sign that they expect the share price to fall.
However, there is also the argument that the end of the lockdown period could provide support after any immediate sell-off, as it also means increased liquidity in the stock - something that financial institutions and large investors like.
There is no definitive answer as to how the end of the lockdown period will affect stock prices. All promotions are different - some will suffer, others will win. It can be assumed that the end of the lockdown period will lead to increased stock volatility in the short term.
Change in share price after IPO
If the stock is up after listing, this could encourage early investors to sell the stock immediately after the lockout period expires. If they fail, this fact can discourage them from selling, but it can also encourage them to reduce risk and cut some losses. But it's worth remembering that their entry point was lower than the IPO price for regular investors, so they can still sell at a profit, even if the share price has been bad enough since listing.
How many shares are eligible for the blocking period?
The number of shares to be blocked is usually quite large. Take SciPlay (an online game company) as an example. Currently, only 22 million shares are freely traded on the open market. But as soon as the blocking period expired on October 30, another 104.3 million shares could be freely traded. The more a company's share capital is affected by the lockdown period, the greater the potential pressure from sellers.
Who owns the shares during the blocking period?
Understanding who owns the shares to be blocked can provide additional insight into whether they will sell their share at the expiration date. Consider the strategy behind each shareholder's stake and why they own it. For example, if the majority of the blocked shares are held by founders and management, they are less likely to sell large stakes compared to institutions or funds that invested early. If the employees of the company received a certain percentage of salary in shares, they will try to sell them at the earliest opportunity in order to cash out. Therefore, it can probably be assumed that regular employees are blocked.