An initial public offering (IPO) lock-up period is a contractual provision that prohibits insiders who already hold stock from selling their shares for a set period after the IPO. While the waiting period varies depending on specific circumstances, it is typically 180 days. Investors should also note that the lock-up period for Special Purpose Acquisition Company (SPAC) IPOs is usually longer. The lock-up period for SPAC IPOs typically ranges from 180 days to one year. Lock-up periods usually apply to corporate insiders, such as company founders, owners, managers and employees. However, they may also apply to venture capitalists and other early-stage private and cross-border investors. An initial public offering (IPO) lock-up period is a contractual provision that prohibits insiders who already hold stock from selling their shares for a set period after the IPO. The standard IPO lock-up period is generally 180 days, while the lock-up period for SPAC IPOs is generally 180 days to one year. The main purpose of an IPO lock-up period is to prevent large investors from flooding the market with stock. Lock-up periods are not required by the U.S. Securities and Exchange Commission (SEC) or any other regulatory agency. Investors can sometimes wait until the lock-up period ends before purchasing stock in newly public companies, thereby saving money. The primary purpose of an IPO lock-up period is to prevent large investors from selling off large volumes of stock, as heavy selling initially depresses share prices. Put simply, corporate insiders often hold a higher percentage of stock than the general public. As a result, their large-scale selling could have a dramatic impact on share prices immediately after the company goes public. The lock-up period can also dispel the impression that the company's closest insiders lack confidence in the company's prospects. Sometimes, insiders simply want to profit from the gains they have long expected. Unfortunately, this could create a false perception that negatively impacts the company without any legitimate reason. After the lock-up period ends, insiders may still be prohibited from selling their shares. This occurs when insiders possess material non-public information, in which case selling stock legally constitutes insider trading. This scenario can arise if the lock-up period expiration coincides with earnings season. ### Legal Status of IPO Lock-Up Periods It is important to note that lock-up periods are not mandated by the U.S. Securities and Exchange Commission (SEC) or any other regulatory agency. Instead, lock-up periods are either set by the listed company itself or required by the investment bank underwriting the IPO. In either case, the goal is the same: to maintain upward share price pressure after the company goes public. The public can learn about a company's lock-up period in the S-1 filing that the company submits to the SEC. Subsequent S-1/A amendments will disclose any changes to the lock-up period. Before investing in an IPO, be sure to research the lock-up period. While newly listed stocks may continue to rise during certain bull markets, the market is not always favorable for IPOs. In less favorable environments, share prices of new stocks typically drop when insiders sell their shares at the end of the lock-up period. Investors can then enter the market in force to purchase shares of relatively new companies at a discounted price. When insiders hold a large stake in the company, the opportunity to acquire cheap shares in this way increases. Waiting for the lock-up period to end also gives investors more time to consider the stock's performance. Did the stock drop right off the bat? If so, investing in other stocks may be a better option. If the stock performs well before the lock-up period ends, it may still be a solid investment. IPO lock-up periods also have some interesting impacts on the options market. Options cannot be purchased on the day of an IPO. However, options for large and even mid-sized companies typically become available for trading before the IPO lock-up period ends. If investors are worried that share prices may drop after the lock-up period expires, they may purchase protective put options. Speculators may prefer to directly buy call options or put options, depending on where they expect share prices to move. Perhaps the most notable lock-up period case occurred with Facebook (now Meta). After its IPO on May 18, 2012, the lock-up period prevented the company from selling 268 million shares during the first three months of public trading. Facebook's share price plummeted to its all-time low of $19.69 per share on the day the first lock-up period expired. This was roughly 50% lower than the company's share price on its first day of trading. Interestingly, Facebook implemented stricter-than-normal restrictions, preventing the sale of an additional 1.66 billion shares before mid-2013. All in all, Facebook's atypical lock-up policy released insider shares on five separate dates. © 2021 Meishun (Hong Kong) Management Consulting Co., Ltd. and Meishun (Hangzhou) Management Consulting Co., Ltd. All rights reserved. Meishun Meiyin (Hangzhou) Consulting & Management Co., Ltd. is a domestic subsidiary of Hong Kong Meishun Management Consulting Co., Ltd. under the same actual controller. Both companies share the same actual controller, are managed under the same Chinese governance framework, and comply with the laws of Hong Kong and mainland China.