What is lockup period and its expiration?

In this article, we will introduce what are the IPO lock-up period and its expiration.

IPO lock-up period

A lock-up period on an IPO is a window of time when early investors and company insiders are not allowed to sell shares. It is set to prevent the market from being flooded with too much supply of a company's stock after the IPO immediately and stabilize the stock price. 

When a privately held company begins the process of going public, key employees may receive reduced cash compensation in exchange for shares of the company's stock. Many of these employees as well as early investors may want to cash in their shares as quickly as possible after the company goes public if there are no limits. The lock-up period prevents stock from being sold immediately after the IPO which will appear the business is not worth investing in, and result in stock prices and demand going down.

It should be noted that lock-up periods are not mandated by the United States Securities and Exchange Commission or any other regulatory body. Rather, lock-up periods are either self-imposed by the company going public or are required by the investment bank underwriting the IPO request.

Lock-up periods usually last between 90 to 180 days. Some companies have special restrictions.

Take Snowflake's lock-up period as an example, the company makes its restricted share eligible for sale in stages, at appropriate times, according to its prospectus.

               SNOW's prospectus            

IPO lockup expiration

Once the lock-up period ends, which is also called expiration, most trading restrictions are removed.

As the lock-up expiration date nears, traders often anticipate a price drop due to the additional supply of shares that are available to the market. The anticipation of a price drop can result in an increase in short interest as traders short-sell stock into the expiration. Investors who are concerned about the upcoming lock-up expiration may try to collar or hedge their long positions with options. 

While stocks tend to sell-off ahead of a lock-up expiration, they don't necessarily continue the selling pressure in all cases. If the pre-expiration sell-off is too dramatic, it can often cause a short squeeze on expiration day as short-sellers look to cover their shares with hopes of locking in profits or cutting losses.

Source: Investopedia