The IPO Markets Are Changing, and so Is the Lock-up Agreement

Palo Alto CA

12 November, 2021

3:34 AM

Description

An initial public offering (IPO) is a crucial time in the life of a company and its stakeholders. Initial investors, employees, and executives can profit from the public listing, and the company can raise additional capital. But IPOs come with a number of limitations, some required and some just common. Today, lock-up agreements, once a common feature of IPOs, face a changing and uncertain future. What is a lock-up agreement? A lock-up agreement is a set period of time during which company insiders are restricted from selling shares, subject to limited and highly negotiated exceptions. As the SEC notes, this lock-up period usually lasts for 180 days, and while federal laws require companies to disclose these agreements, lock-ups are not mandated except in certain states with “blue sky laws.” Lock-up agreements exist to help minimize fluctuations in a company’s share price when the stock first hits the public market. By preventing insiders from dumping shares quickly, a lock-up agreement restricts the supply of stock for sale on the public market, which, in turn, reduces the risks of potentially causing the stock price to plummet at an especially critical time. In addition, a company typically agrees not to issue additional securities. The lock-up agreement is usually heavily negotiated with the underwriter. As Crunchbase notes, once a lock-up period ends, the free-market sale of stock shares by insiders can serve as a barometer of sorts. If insiders hold their shares, perhaps they believe the price will rise, but selling shares may suggest otherwise. With all the changes in market dynamics, investor priorities, and consumer interests due to the pandemic, the outlook for 2021 may be difficult to discern, but we can follow some trends. From our experience, the 180-day lock-up period is still, by far, the most common length. But despite that consistency, in recent times, there is a trend for companies to structure lock-ups with different lock-up periods for different parties. Read More here. Connect with Louis Lehot:Website: Louis LehotLinkedIn: Louis LehotFacebook: Louis LehotTwitter: Louis LehotInstagram: Louis LehotYouTube: Louis LehotVimeo: Louis LehotPinterest: Louis LehotRead the Articles written by Louis Lehot:Louis Lehot- What to expect for seed and pre-seed stage financing in 2021Louis Lehot- A Brief Legal Guide To Buying And Selling Shares Of Private Company StockLouis Lehot- The IPO Markets Are Changing, And So Is The Lock-up AgreementLouis Lehot- What are SPACs, and how they are different from IPOs?Louis Lehot- L2 Counsel Represents AgTech Leader FluroSat In Dagan AcquisitionLouis Lehot- Considering Selling Your Company? Be Clear on Your Fiduciary DutiesLouis Lehot- Incentivizing With Stock Options: What Your Startup Needs To Know About ISOs, NSOs And Other Parts Of The Alphabet SoupLouis Lehot- Ready To Sell Your Startup In 2021?Louis Lehot- The State Of The Acqui-Hire In 2021: The Good, The Bad, The Why And What’s NextLouis Lehot- Leaving Your Job? Don’t Forget Your Stock Options…Louis Lehot- A Short Primer for Startups on Local Labor and Employment Law ComplianceLouis Lehot- How To Clean Up A Corporate MessLouis Lehot- Calculating And Paying Delaware Franchise Taxes — Startups Need Not Panic