Lockdown

What Is Lockdown?

A lockdown, otherwise called a lockup, is a period of time where holders of a company's stock are restricted from selling their shares.

Grasping Lockdown

Lockdown limitations are normally put in place in anticipation of a company's initial public offering (IPO). They generally influence company insiders like founders, executives, and early investors.

Lockdown periods are an important part of the IPO cycle. Company insiders are many times anxious to sell their shares following an IPO to cash out of their investment. In any case, too much selling could terrify new investors who might decipher it as a lack of faith in the company's future possibilities.

Lockdown periods are a compromise solution that expects insiders to pause, regularly for 90 to 180 days, before selling their shares. In spite of the fact that lockdown periods are not required by law, they are much of the time mentioned by underwriters who need to guarantee an effective IPO.

Since underwriters frequently demand a lockdown period, investors ought to comprehend that the lack of selling by insiders during the lockdown doesn't be guaranteed to show they're sure about the eventual fate of the company. They might wish to sell yet are briefly kept from doing as such.

The finish of the lockdown can be violent for investors, since it's frequently associated with increased trading volume. Insiders who are at last free to sell their shares might do as such, putting lower pressure on the share price.

Simultaneously, new investors who feel positive about the possibilities of the company could make a move to purchase shares at generally low prices. For certain investors, for example, pension funds and other institutional buyers, this increase in liquidity might make the company more alluring.

Lockdown Example

A prominent illustration of a lockdown period is that of Facebook (FB), which completed its IPO in May of 2012 at a price of $38 per share. Facebook's IPO incorporated a 180-day lockdown period which ended in November 2012.

The company's shares declined to below $20 per share not long after its IPO, yet transcended its $38 offer price soon after the expiration of its lockdown period. The shares had acquired almost 10-overlay by mid-2021.

Albeit numerous insiders sold shares in Facebook following the finish of the lockdown period, new retail and institutional investors immediately took their place. In December 2013, Standard and Poor's (S&P) announced that Facebook would be remembered for the S&P 500 index. This announcement further upheld the proceeded with rise of its share price by making the shares open to exchange-traded funds (ETFs) and other investment vehicles linked to the S&P 500 index.

Features

• Lockdown periods regularly last 90 to 180 days and keeping in mind that not mandatory, they're frequently mentioned by IPO underwriters.
• Lockdowns safeguard companies from inordinate selling pressure following their IPO.
• The period following the expiration of the lockdown can be unstable, as holders sell shares and new investors have their spot.
• A lockdown is a period of time where holders of a company's stock are restricted from selling their shares.