What is the lockup period in an IPO, and what is it for?
Thank you, Miggy, for this question. When a company raises money through the PSE (with an IPO, FOO, etc), the PSE’s rules say that any major shareholders need to submit their shares to a lockup period of either 180 days or 365 days, depending on when the shares were acquired, and whether or not the company meets the PSE’s operational track record requirements. (PDF: Consolidated Listing and Disclosure Rules; Article III, Part D, Section 2).
Whatever shares are “locked up” according to these rules cannot be traded on the PSE or transferred in any way.
The shareholders affected and shares to be locked up are always listed in the prospectus, just do a “CTRL-F” for “lock-up”.
The lock-up rules are meant to prevent owners and significant shareholders from doing a “rug-pull” on IPO buyers and early investors, and these restrictions are meant to encourage organic buyers and sellers to establish a stable market price before introducing the variable of having “the rest” of the shares potentially liquid and tradeable.
MB BOTTOM-LINE
In my opinion, lock-up dates are most important when there are significant minority investors that do not have a hand in the operation of the business.
Normally, majority owners will have all the opportunity in the world to dictate the number of shares that will be sold during the IPO, so generally (absent major changes in the majority owner’s circumstances) I assume that the majority of owners will exit their lock-up periods not interested in giving up any more ownership/control of the company than they already have.
Those significant minority holders, though, are another story. They might not have been in a position to cash-out their shares at the IPO to the same extent as the majority owner, and their shares might be more important from a supply perspective.
Minority holders naturally have less of a “rug-pull” ability, but their influence can still be significant, especially in stocks that are more thinly traded.
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.
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