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What is a lockup agreement?
The lockup agreement is a legal contract between the underwriters and the insiders (management, employees, directors, venture capital investors, major shareholders) of the company not to sell any shares of stock for a certain period of time.
Does every IPO have a lockup agreement?
Yes, the insiders always sign a lockup agreement with the underwriters, typically for a period of 180 days (6 months). Occasionally, lockup agreements can be for periods of 120 days up to 365 days.
What happens when there is a secondary stock offering before the original lockup expires?
In most cases a much smaller number of shares will be released 180 days from the IPO. The bulk of the shares will be locked-up for an additional 90 days from the date of the secondary stock offering. IPO Lockup.com tracks these stocks and each is noted in 'The Lockup Zone'.
Why do the underwriters want the insiders to sign a lockup agreement?
Typically, only 15% to 20% of the company's shares are sold at the IPO, therefore the insiders continue to own the vast majority of the stock. If one of the insiders decided to sell a large number of shares, then it could be devastating for the stock price.
Why is it important to track when lockups expire?
When the lockup expires there is the potential for millions of new shares to be sold into the market. The additional shares may create a temporary oversupply of the company's stock, causing the stock price to fall sometimes between 10% to 15% over a two to three day period ('The Lockup Zone').
Is the lockup expiration date the last day of the lockup or the first day a restricted shareholder can sell?
The restricted shareholder can sell the next day; after the expiration date.
What is 'The Lockup Zone'?
The Lockup Zone is the day before, the day of, and the day after the lockup expires. Typically, the drop in the stock's price will occur during this three day time period. The stock's price will usually begin to rebound two to three days after the lockup expires.
Isn't that a bad sign if the insiders are selling their shares?
It depends on which insiders and why the insiders are selling their shares. In most IPO's there will be venture capital investors that want to get out of an IPO as quickly as possible in order to realize the gain and focus their attention on other investments. Also, the company's founders and executives may want to sell some shares in order to diversify their personal holdings. The insiders could be trying to realize gains if the IPO has been extremely successful. However, insider selling can be a sign the stock is perceived to be overvalued or there are potential problems in the company's future.
With all these new shares being sold into the market, how can this be good for the stock's price?
Since only a small number of shares are sold at the IPO, there is a very small 'float' (available shares in the market) of the company's stock. The release of new shares after the end of the lockup can make the stock more attractive for institutional investors who like to hold a large number of shares and need more liquidity.
Does the stock's price always drop when the lockup expires?
No, the drop does not always occur because insiders do not always sell. Occasionally the underwriter may release the insiders in part or entirely from the lockup before the expiration. Furthermore, Wall Street sometimes anticipates the extra shares and reacts a few days or even weeks in advance.
Does the stock's price always rebound a few days after the lockup expires?
The majority of the stocks do rebound a few days after the lockup expiration, but some continue to fall and may never recover. There is no guarantee this short-term dip will occur.
Can the insiders sell all their shares the day the lockup expires?
No, typically each insider has a variety of rules he must follow after the lockup has expired such as Rule 144, Rule 144(k) and company blackout periods.
Rule 144 - After the expiration of the lockup period, a person who has beneficially owned restricted securities for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:
1% of the then outstanding shares of common stock, or
the average weekly trading volume of the common stock during the four calendar weeks preceding the sale.
Sales are also subject to manner of sale and notice requirements and to the availability of current public information about the company.
Rule 144(k) - a person who has beneficially owned the shares proposed to be sold for at least two years can sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.
What does 'Trading Days to Absorb New Shares' mean which is a column in 'The Lockup Zone'?
The 'Trading Days to Absorb New Shares' is a theoretical measurement of liquidity. The formula is 'Shares Released from Lockup' divided by 'The Average Daily Trading Volume'. The result is the number of trading days it would take the insiders to sell all the shares in which the lockup has just expired. The number is theoretical since the insiders may not sell any shares and must comply by Rule 144 explained above.
http://www.ipolockup.com/faq.cfm
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