What happens to shares after the lock-up period

When a lock-up period ends, insiders and pre-IPO shareholders may start selling shares they were barred from selling after the IPO, usually for 180 days. The supply of tradable shares can rise sharply, so the price may come under pressure around the expiry date, but the effect varies: classic studies found an average drop of 1–3%, not a crash.

What is a lock-up period after an IPO?

It is the period, set by agreement, during which company insiders may not sell their shares after the IPO. Most last 180 days.

According to Investor.gov, insiders, including employees, their friends and family, and large shareholders, typically sign a lock-up with the underwriter before the company goes public, so that their shares do not enter the public market too soon. Terms vary, and some lock-ups also limit the number of shares that can be sold over a set period. US securities laws require a company using a lock-up to disclose its terms in its registration documents, including the prospectus.

Investors who buy on the exchange are not bound by it; how an IPO works is covered in what an IPO is.

Why do IPOs come with lock-ups?

To keep a large block of shares off the market while trading in the new stock settles, and to keep insiders committed to the company after the listing.

The SEC's bulletin on investing in an IPO notes that restricted securities, lock-ups and underwriters' policies against quick resale together limit trading right after an offering. In a study of 2,794 IPOs, Alon Brav and Paul Gompers found the strongest support for lock-ups as a commitment device against moral hazard, the risk that insiders act against new shareholders once they are free to sell: insiders of companies where that risk was greater locked up their shares for longer.

What happens when the lock-up expires?

Shares that were locked up become eligible for sale, and the number of shares that can trade grows. For many early investors this is the first chance to sell after the IPO.

The same SEC bulletin calls the shares that are outstanding but cannot yet trade the "market overhang". It warns that when lock-ups expire the price may decline significantly if a large number of shares become available all at once. Not every holder can sell freely even then:

Under the SEC's Rule 144 guide, an affiliate may sell in any three months no more than the greater of 1% of the class's outstanding shares or its average weekly trading volume over the four weeks before the Form 144 notice.

Does the share price always fall after a lock-up ends?

No. On average the reaction in research is small and negative, and an average says little about a particular stock.

Laura Field and Gordon Hanka examined 1,948 lock-ups in the Journal of Finance in 2001. When lock-ups expired, they found a three-day abnormal return, meaning the return beyond what the market would explain, of −1.5% and a permanent 40% increase in average trading volume. Both effects were much larger at venture-backed companies, where venture investors sold more aggressively than executives. Eli Ofek and Matthew Richardson, in an NYU Stern working paper of 2000, reported a 1–3% price drop and a 40% rise in volume, even though the expiry date is known in advance.

Both studies are more than 25 years old. For a given company the result depends on how many shares unlock, who holds them and how the business and the market are doing at the time.

How can you find out when a lock-up ends and how many shares it covers?

From the IPO prospectus, which is public on the SEC's EDGAR database.

1. Open the final prospectus. According to Investor.gov, it is usually filed on EDGAR as a 424B3 or 424B4.
2. Find the lock-up terms. Length, exceptions and any release of shares in stages.
3. Read "Shares Eligible for Future Sale". It shows how many shares can be sold after the IPO and when.
4. Check "Principal and Selling Shareholders". It lists the main shareholders and, for those selling in the IPO, how many shares they own, sell and keep.
5. Watch for early releases. Insiders can be released from a lock-up before its end date; Brav and Gompers found this more likely at companies whose shares had risen more, venture-backed companies and those with top-tier underwriters.

A recent example of a lock-up released in stages, from the SpaceX prospectus, is described in how pre-IPO differs from IPO.

What does the end of a lock-up mean for a pre-IPO investor?

It is usually the first moment when a pre-IPO stake can be turned into cash on the exchange.

Founders, early investors and employees typically sign lock-ups, so a pre-IPO shareholder usually cannot sell on the first trading day. If you hold through an SPV or fund, the vehicle owns the shares and, under its documents, either sells them or distributes them to investors. The price at that point can be above or below both the IPO price and your entry price. The other exit routes are compared in how to exit a pre-IPO deal, and restrictions on private shares in private market liquidity.

What are the risks around a lock-up expiry?

The main risks are price pressure from new supply and the uncertainty of when, and how much, insiders will sell.

• Price pressure. Investor.gov warns that the price may drop in anticipation that locked-up shares will be sold when the lock-up ends.
• Early releases. Shares can be freed before the stated date, so the calendar is not a guarantee.
• No price floor. When the lock-up ends, the stock may trade below the IPO price or below what a pre-IPO investor paid.