Lock-up periods can also be a way for companies to keep up appearances.

The traditional 180 days also give the company time to announce up to two consecutive earnings reports, which can serve to provide additional details and track record regarding the business operations and outlook. The “cooling-off” period mandated by the lock-up can also help reduce the volatility of the new stock and allow for the market to settle into a share price based on natural supply and demand and initial company performance. As such, the purpose of a lock-up period is to ensure that shares owned by company insiders do not all flow out together into the public market too soon after the offering, increasing the supply (float) of the stock with a massive inflow of sellers and thereby negatively impacting the stock price. Therefore, if large shareholders were allowed to off-load holdings immediately after a company goes public, these selling activities could drastically depress the stock’s price. Typically, company insiders own a lot more shares than the public market. These restrictions are not mandated by the Securities and Exchange Commission (SEC), but rather are self-imposed contractually by companies or are required by the investment banks underwriting the IPO. The IPO lock-up period is a pre-set period of time – conventionally 180 days – after a company goes public, during which some early investors and employees of the company are not allowed to sell their shares.

Why does this exist, how does it impact the stock and what are some of the recent dynamics around this period?

This period keeps pre-IPO investors from immediately selling their stock. When a company is about to go public, early investors anticipate the stock rising after the IPO, but they must also endure a mandatory waiting period called the lock-up period.

Stock lock up period