What Is a Lockup Period?
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If you've ever heard of a pump-and-dump scheme, you know they're no fun—and you likely don't want to be a part of one. That's why initial public offerings (IPOs) have lockup periods.
Lockup periods prevent IPOs on the US stock market from turning into pump and dumps the way initial coin offering scams often do.
IPO lockup periods, explained
A lockup period is the period of time after an IPO that employees and other institutional investors are unable to sell stock.
Lockup periods don't apply to individual investors as they don't tend to hold large portions of stock like insiders do. Plus, retail investors aren't privy to insider information the way employees and other involved parties are.
Why IPOs have lockup periods
Without lockup periods, IPOs would be more prone to the risk of pump-and-dump schemes. Plus, the security of a lockup period helps companies court investors in the general public. By telling them, "Hey, you have a real chance to profit here," they're basically marketing themselves to investors.
Do all public offerings have lockup periods?
Traditional IPOs and IPOs of special purpose acquisition companies (SPACs) have lockup periods. SPACs tend to have longer lockup periods because they're more speculative in nature as blank-check firms.
Direct listings are another way to go public and do not carry lockup periods. However, only established companies like Spotify (NYSE:SPOT) and Roblox (NYSE:RBLX) typically conduct direct listings. It's worth noting that Coinbase Global (NASDAQ:COIN) went through a direct listing with no lockup period and its stock whipsawed in the red shortly after going public.
How long is a company's IPO lockup period?
Every company has its own length of time specified in its registration statement with the Securities & Exchange Commission (SEC). However, most lockup periods in the US last between 90–180 days.
In an ideal scenario, the lockup period lasts just long enough for a company to ease its way into the market with limited volatility. IPOs are often much more volatile than veteran stocks. This is a way to try and calm the madness.
Bottom line on IPO lockups
Lockups are good for investors. Investing in stock from a freshly minted IPO can feel nerve wracking. For many investors, the volatility proves difficult to handle. But in the right circumstances, a lockup period can prevent insiders from exiting their positions too early and leaving small-time investors to pick up the pieces.
IPOs can hit the market hard and fast. As of mid-November 2021, the US stock market has let 922 companies go public. Compare that to the Dubai Financial Markets, which has minted just one IPO since 2017 and lost out on a Tristar Transport deal in April 2021. Lockup periods are a tool in the SEC's toolbox.
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