| A lockup agreement is a contract between an underwriter and a company going public in which the insiders of the company, including directors, officers, employees, and friends and family agree that they will not sell shares of the company they own until a set period of time after the company's shares are sold to the public. The objective of the lockup agreement is to provide a stable market for the securities for a reasonable time after the initial public offering.
The time period for lockup agreements often is 180 days, although other time periods may be agreed upon. Also, the lockup agreement may provide for different time periods for different amounts of shares. Although federal securities laws do not prescribe a time period or other conditions for lockup agreements, the existence and terms of lockup agreements must be disclosed in registration documents and in the prospectus for the public offering connected with the lockup agreement.
Investors may consider public information regarding whether and when quantities of stock may become eligible for sale in public markets through expiration of lockup agreements. It may be anticipated that a significant amount of stock being offered for sale could depress the price of the stock. Information on lockup agreements may be obtained from company shareholder relations departments, the EDGAR database maintained by the Securities and Exchange Commission, the Public Disclosure Office of the SEC, and private websites.
Even if lockup agreements have expired, there may be other restrictions following an initial public offering on the public sale of shares obtained by insiders prior to the IPO. For example, Securities and Exchange Commission Rule 144 governs the sale of restricted or control securities. Restricted securities acquired in unregistered private sales from the company issuing the stock in return for investment capital must be held for a year before they may be sold in the marketplace. Similarly, control securities that carry the power to direct the management and policies of the company issuing the stock may not be sold on the market by the control person for a year after obtaining the securities in restricted form. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |