When a company holds its initial public offering, the prospectus will contain a provision that says that all of the company's officers, directors, employees and substantially all of the company's stockholders have agreed with the company and the underwriters not to sell shares for a specified period of time, usually 180 days, but sometimes less. This period of time is known as the lockup period, and the purpose of the lockup period is to limit the number of shares of the company's stock that is available for sale after the company goes public. The concern is that if a large number of shares is put up for sale soon after an IPO that the market for the company's stock will be roiled and the stock price will drop.
To find lockup information in the IPO prospectus (known as a 424B4 SEC filing), look in the "Shares Eligible For Future Sale" section and the sub-heading "Lockup Arrangements" or "Lock-Up Arrangements." Here's a link to Zynga's prospectus and the "Shares Eligible For Future Sale" section, where Zynga had a 165 day lockup period. Facebook has a staggered lockup period, with one period expiring 91 days after the IPO, another at 181 days and a final period expiring after 211 days.
Stock Price Drop on Lockup Expiration. Even though the market has advance notice that a lockup period is expiring and so the event should be priced into the market, it is still a common occurrence that a the stock price will fall when a lockup period expires. As an example, when Groupon's lockup period expired on June 1, 2012, the stock fell almost nine percent, on trading volume that was nearly four times greater than the prior day. Note that Groupon had a very large overhang of stock (up to 603 million shares) that was eligible for trading when the lockup expired, when the IPO was for 35 million shares, so a 17x overhang. Note also that Groupon's original 180 day lockup period was extended when the company restated earnings at the end of March.
Secondary Offerings. One way companies and underwriters manage this process is to undertake a secondary offering prior to the lockup expiration. This typically only occurs if the stock has been trading up in the aftermarket. The benefit of a secondary offering is that the offering is marketed by the company and the underwriters, and it is an orderly process with usually minimal impact on the share price. It also reduces the number of shares that will flood the market when the lockup period expires. Typically in secondary offerings the shares are being sold by insiders and pre-IPO investors (such as venture capital and private equity firms) and not by the company.
As an example, Zynga held a secondary offering in March 2012 in which all of the shares sold were from selling stockholders. Zynga's IPO priced at $10 per share in December 2011 and the secondary offering priced at $12 per share in March 2012. There were 100 million shares issued in Zynga's IPO and almost 43 million issued in the secondary offering, for a secondary offering size of less than half that of the IPO. This secondary offering helped to reduce the number of shares that would be available for trading when the lockup restriction expires.
To find lockup information in the IPO prospectus (known as a 424B4 SEC filing), look in the "Shares Eligible For Future Sale" section and the sub-heading "Lockup Arrangements" or "Lock-Up Arrangements." Here's a link to Zynga's prospectus and the "Shares Eligible For Future Sale" section, where Zynga had a 165 day lockup period. Facebook has a staggered lockup period, with one period expiring 91 days after the IPO, another at 181 days and a final period expiring after 211 days.
Stock Price Drop on Lockup Expiration. Even though the market has advance notice that a lockup period is expiring and so the event should be priced into the market, it is still a common occurrence that a the stock price will fall when a lockup period expires. As an example, when Groupon's lockup period expired on June 1, 2012, the stock fell almost nine percent, on trading volume that was nearly four times greater than the prior day. Note that Groupon had a very large overhang of stock (up to 603 million shares) that was eligible for trading when the lockup expired, when the IPO was for 35 million shares, so a 17x overhang. Note also that Groupon's original 180 day lockup period was extended when the company restated earnings at the end of March.
Secondary Offerings. One way companies and underwriters manage this process is to undertake a secondary offering prior to the lockup expiration. This typically only occurs if the stock has been trading up in the aftermarket. The benefit of a secondary offering is that the offering is marketed by the company and the underwriters, and it is an orderly process with usually minimal impact on the share price. It also reduces the number of shares that will flood the market when the lockup period expires. Typically in secondary offerings the shares are being sold by insiders and pre-IPO investors (such as venture capital and private equity firms) and not by the company.
As an example, Zynga held a secondary offering in March 2012 in which all of the shares sold were from selling stockholders. Zynga's IPO priced at $10 per share in December 2011 and the secondary offering priced at $12 per share in March 2012. There were 100 million shares issued in Zynga's IPO and almost 43 million issued in the secondary offering, for a secondary offering size of less than half that of the IPO. This secondary offering helped to reduce the number of shares that would be available for trading when the lockup restriction expires.
