Insiders of a firm are prohibited from selling their shares for a predetermined amount of time under lockup agreements. The shares become “locked up” as a result. To ensure that shares held by these insiders aren’t offered too soon after the initial public offering, a lockup agreement is generally signed before a business makes its initial public offering.
Venture capitalists, business directors, managers, executives, employees, and their families and friends could all be asked to sign a lockup agreement. The length of a lockup agreement is typically six months, but durations can be as long as a year. The shareholder may sell their company shares upon the termination of the lockup agreement.
When Would You Use a Lockup Period?
In many investments, a lockup period is a standard component. Almost all closely held investments and new public firms impose a lockup period for new investors who purchase.
Lock-up of IPO
Perhaps the most well-known sort of lockup time is the IPO lockup. Once it goes public, freshly issued and newly public shares of a firm cannot be sold for 90 to 180 days after they are first listed. This rule was put in place to stop large-shareholder shareholders from flooding the market with shares during the first period of trading. The IPO lockup period also maintains the share price during a public company’s least stable time of operation.
Locking Up Hedge Funds
A lockup term is also required for hedge funds and other closely held investment vehicles, but the lockup periods for hedge funds are substantially longer than those for IPOs. A lockup for a hedge fund typically lasts two years.
The fact that hedge funds’ underlying investments are frequently illiquid is the cause of this lengthy lockup period. When providing the money to leaving investors, fund management (and the other investors) would suffer greatly if investors could withdraw money ahead of schedule. The lengthy lockup period enables hedge funds to invest over a longer time frame with a possibility for greater returns.
Major Player Lockdown
Depending on their particular agreements with a corporation, some people may occasionally be subject to a lockup. For instance, a CEO may be required to be locked up during crucial times for the business to avoid sending the market the wrong signals.
Lockup Contract
All parties must sign a lockup agreement to guarantee that the lockup time is respected. The lockup agreement is just a contract that specifies how long the lockup period will last. In initial public offerings (IPOs), a lockup agreement is made between underwriters and shareholders of the company to safeguard the share price while the underwriters assume the risk.
Why Is the Expiration of the Lockup Significant?
The lockup expiration date can result in instability in an investment vehicle or a severe drop in share price when stocks flood the market because it is the first time that shareholders can withdraw from an investment.
What Clauses Could Be in a Lockup Agreement?
The basic agreement typically has a “no-sell clause” for the first 180 days, though the terms can vary. These agreements may also place restrictions on other matters, such as the number of shares an insider may sell in a given period of time. Typically, the backer or underwriter sets the terms.
Lockup contracts have three parts:
- Shares are locked up in accordance with the terms of the agreement.
- Due to potential stock value changes, you must be aware of the date of the agreement.
- The Quiet Period is a 25-day window after the initial public offering, during which the corporation, executives, and security analysts are prohibited from recommending the stock
Do Lockup Agreements Have to Be Legal?
Some states do mandate their possession for businesses. Only the disclosure of the contents of such agreements in the company’s registration paperwork is required by federal law, assuming such agreements are even present within the firm.
Timing of the Lockup Period
In the event of an initial public offering (IPO), the underwriters will attempt to get lockup agreements from all current security holders, or almost all of them, for a period of 180 days, with a few specific carve-outs.
Although it is uncommon, some initial public offerings (IPOs) may include staggered lockup periods that vary based on the type of holder (i.e., whether the holder is an employee or other option holder, or a director, officer, or another insider).
The lockup period in an IPO may occasionally, though it is extremely rare, be cut short to 120 or 150 days to give holders the chance to sell securities before the issuer’s quarterly earnings blackout period or to release them from the lockup agreement if the issuer’s common stock is trading above a certain price. The lockup period for a follow-on offering (i.e., an offering made after an issuer’s IPO) may range from 30 days to 90 days based on a number of variables, including the issuer’s experience and the stock’s liquidity.
Securities and Lockup Parties
As long as the lockup agreement holds, the issuer should discuss and negotiate which parties will be subject to lockup agreements with the underwriters or placement agents as early in the process of preparing for the transaction as possible, particularly if large shareholders who are not directors or officers may be required to sign lockup agreements.
In almost all IPOs, a lockup agreement will apply to most pre-IPO shares, including shares bought through a directed share program. Lockup agreements are often only acquired from the issuer, directors, and officers in follow-on offerings, which are frequently conducted in a short amount of time.
Given that knowledge about a future offering may be considered material nonpublic information in and of itself, other important investors are typically not informed of the possibility that a follow-on offering may be made.
Existing shareholders would typically not want to learn important nonpublic information that might limit their capacity to trade the issuer’s securities. In some circumstances, the lockup agreement may also apply to any donee, distributee, or transferee who received lockup securities in transactions allowed to be performed in accordance with lockup carve-outs. The class or classes of securities that the lockup agreement will cover should also be discussed between the issuer and the underwriter.
For instance, the issuer should think about whether lockup limitations on other forms of equity instruments, such as preferred stock, will apply to it, its directors, or officers in connection with an offering of common stock.
How Can I Tell Whether a Business Has a Lockup Agreement?
By asking your broker or requesting a copy of the prospectus from the business’s shareholder relations department, you can learn whether a company has a lockup agreement. The SEC’s database is also helpful if the company files its prospectus electronically.
Do I Need a Trade Regulation and Antitrust Attorney?
If you are being accused of breaking antitrust law, you should immediately seek legal advice. Antitrust law violations are significant offenses with both civil and criminal consequences in the United States. Speaking with the correct attorney will help you understand your legal rights and protect any available legal remedies.
You should see a business attorney who can thoroughly examine your case if you suspect that another corporation broke the antitrust laws and caused injury to you or your business.
