Lock Up Agreements In Ipo

7:06 am Uncategorized

A lock-up is a contractual provision that prevents insiders of a company from selling their shares for a certain period of time. They are often used as part of the initial public offering (IPO). Many investment experts, including Jim Cramer, sometimes recommend that investors wait until the lock-in period expires before investing in newly listed companies. While new stocks may simply continue to rise during some bull markets, the market is not always favorable for IPOs. In less favorable environments, new stocks often fall in price when insiders unload their shares at the end of the lockout period. Investors can then scan and receive shares of the relatively new company at a discount. Fenwick`s group recently conducted a survey of more than 80 U.S. technology companies that have conducted an IPO since January 1, 2017 to determine whether the terms of the lock-in agreements have changed in light of recent market developments. The investigation focused on three important lockout agreements: lockout duration, blackout exit rules, and price-based exit rules. The purpose of a lock-in agreement is to prevent corporate insiders from offloading their shares onto new investors in the weeks and months following an IPO. Some of these insiders could be early investors, such as VC companies, who made their purchases in the company when it was worth significantly less than its IPO value. As a result, they may have a strong incentive to sell their shares and make a profit from their initial investment. Even if there is a lock-up, investors who are not company insiders may still be affected once this lock-in agreement has passed its expiration date.

If the lock-ups take place, business insiders can sell their shares. If many insiders and venture capitalists want to withdraw, it can lead to a sharp drop in stock prices due to the huge increase in the supply of shares. The lock-in agreement helps reduce the pressure on volatility when the company`s stock is in the first few months. Only after the expiration of the prohibition period will insiders be able to sell. Of course, an investor can consider both of these possibilities, depending on their perception of the quality of the underlying business. The decline after the lock-up may, if it does occur, be an opportunity to buy shares at a temporarily depressed price….

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