The lockup is a contract between a company and its founders, executives and investors that prohibits selling of their shares for a period of time — usually 180 days. But over the past year or so, Wall Street has been changing things up, and it has become more common to shorten the lockup period — in many cases, from 180 days to just 90.
Such has been the case with several public offerings, including Facebook (NASDAQ:FB), Zynga (NASDAQ:ZNGA) and ExactTarget (NYSE:ET).
Why is this happening?
The main reason is that it helps Wall Street underwriters snag IPO assignments, especially for hot companies. After all, the founders and investors want to get liquidity. The bankers also will put together a secondary offerings of shares, which means generating even more fees.
The impact isn’t as positive for retail investors. The lockup expiration often comes as a surprise to them as shares flood the market and the stock price comes under pressure. This isn’t always the case, as selling can start before the expiration.
Still, for IPO investors, it’s a lesson to remember to track the lockup — and perhaps avoid the stock until the selling subsides.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.
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