Market Standoff Agreement

What is a Market Standoff Agreement?

A market standoff agreement forestalls insiders of a company from selling their shares in the market for a predefined number of days after an initial public offering (IPO). The market standoff term is generally 180 days yet can differ from just 90 days to as much as one year.

These agreements are otherwise called lock-up agreements.

Figuring out a Market Standoff Agreement

Market standoff agreements permit the market to assimilate the sale of all new shares of stock issued in a initial public offering (IPO). In the event that insiders or others holding shares of the company can promptly start to sell their holdings, it can flood the market and cause a sharp decline in stock value. Generally, any issuance of company stock to employees will have a clause in the contract permitting the issuer to lock-up insider sales during an IPO. If not, insiders could challenge the disallowance on selling their shares.

A private company is a firm held under private ownership. They might issue stock and have shareholders, yet their shares don't trade on a public exchange until they go through an IPO or other offering processes. Companies might issue private shares to encourage investment and to reward employees.

Market Standoff Agreements Protect Brokerage Houses

Market standoff agreements are normally required by brokerage houses when they are recruited to market and underwrite an IPO. The brokerage house gets a fee for underwriting the initial public sale. Likewise, they will generally give the issuer a guarantee to the number of shares they will sell during the offering. This guarantee can place the underwriting bank at considerable risk. On the off chance that the stock value dives during the IPO, the brokerage could lose money.

Since a huge insider selloff would without a doubt discourage new purchasers of the stock, brokerage firms are prudent to limit such sales. An illustration of the impact inside sellers can have on a stock is seen during the dot-com boom, and later the bust beginning in 2000. Various stocks in the sector lost a critical piece of their market capitalization not long after the expiration of market standoff agreements.

Flexible Expiration Dates

In recent years, market standoff agreements have been updated considering new exchange rules administering brokerage research reports. Those rules restrict an underwriter's research department from distributing an expert's report or a purchase/sell recommendation on the stock being referred to inside the 15 days before and following the expiration of a market standoff agreement. Assuming the company giving the stock hopes to be delivering an earnings report inside that period, the market standoff agreement is in many cases advanced by an adequate number of days to permit distributing a report.

For instance, a company plans to issue an IPO on April 10, 2020. The market standoff agreement lapses 180 days after the fact, on October 7. Yet, the company is planning its quarterly earnings release on October 15, which is in no less than 15 days of the expiration. By moving the standoff agreement to month's end, on October 31, the brokerage firm can distribute a research report for its clients on October 16, the day after the earnings release.

Certifiable Example of a Market Standoff Agreement

On May 10, 2019, Uber Technologies (UBER) commenced trading on the New York Stock Exchange (NYSE) at $42. As recorded in filings with the Securities Exchange Commission (SEC), directors and executive officers agreed that they would no sell their shares, or participate in trades that would emulate a sell transaction, for 180 days after the filing of the prospectus (documented on April 11, 2019) without prior written consent from Morgan Stanley and Co. (MS), the underwriter. A transaction that would imitate a sale transaction is buying put options on the stock, for instance.

Features

• Insiders selling soon after the IPO can cause large price drops, harming investor confidence in the stock.
• This safeguards the underwriter who is endeavoring to make a market for the IPO, and the investors who are buying the IPO.
• A market standoff agreement, or lock-up agreement, precludes insiders from selling shares inside a certain defined period after the IPO or prospectus filing.