Lock-Up Agreements

Once a public offering closes, the next risk is a wall of insider supply hitting the market in the first few weeks after pricing. Lock-up agreements solve that risk by contract.

What Are the Two Lock-Up Types?

Think of it this way: The issuer lock-up blocks new shares coming OUT of the company. The shareholder lock-up blocks existing shares going INTO the market from insiders. Together they create a window of supply stability after pricing while the public float establishes a real trading price.

What Does the Issuer Lock-Up Restrict?

The issuer typically agrees not to issue additional securities for the lock-up period without underwriter consent. The covered activities are whatever the agreement specifies, and commonly include:

• Primary issuance of new shares (e.g., a follow-on offering)
• Registered exchanges of new securities
• Acceleration of any stock-option vesting or employee-stock-purchase windows that would put new shares into the market

The purpose is to prevent the issuer from flooding the market with new shares right after the offering closes, which would depress the price the underwriter just established.

Exam Tip: Gotchas

• Issuer lock-ups can also cover registered exchanges and employee stock activity, not just direct primary issuance, when the agreement says so. A question that hides the supply event behind an employee-stock-purchase-plan window or a private exchange may still be testing the lock-up; read what the specific agreement covers.
• The lock-up start date, duration, covered securities, and release terms are all set by the agreement itself, not by a fixed rule. Deals typically run the lock-up from the date of the prospectus or pricing, but treat that as the deal-specific term the fact pattern gives you, not a universal anchor.

What Does the Shareholder Lock-Up Restrict?

The shareholder lock-up restricts insiders, employees, and pre-IPO holders from selling existing shares for the lock-up period. The typical IPO standard is 180 days (about six months), though some technology and special purpose acquisition company (SPAC) structures use 90 days and complex deals can extend to 365 days.

• Covered holders: officers, directors, founders, employees with vested stock, VC backers, PE backers, and other pre-IPO shareholders
• Lock-up terms are disclosed in the S-1 (or F-1 for foreign private issuers) under the "Shares Eligible for Future Sale" and "Underwriting" sections of the final prospectus
• The lock-up agreement typically gives the underwriter the right to release shareholders early from the lock-up (a "lock-up waiver"); an early release of a covered new-issue lock-up generally requires public notice, subject to specific exceptions. The waiver actor, like every other lock-up term, is set by the agreement, so read the fact pattern rather than assuming it

The lock-up disclosure tells public investors exactly when the insider supply overhang will lift. That information feeds into the public-investor's expectation of how the stock will trade once the lock-up cliff arrives.

Exam Tip: Gotchas

• 180 days is the typical IPO lock-up, not a regulatory minimum. Lock-up length is negotiated between the underwriter and the holders. The exam may quote 90 or 365 days in a deal-specific fact pattern; that is still consistent with a normal lock-up.
• The lock-up waiver right typically belongs to the UNDERWRITER, not to the issuer and not to the holders themselves, but it is a negotiated agreement term rather than a fixed rule. Read the fact pattern for who actually holds the release right before answering.

Are Lock-Ups SEC Mandates or Private Contracts?

The single most-tested distinction in this section is the source of the lock-up requirement. The SEC does NOT mandate lock-ups. They are private contracts that the underwriter negotiates with the issuer and the pre-offering holders.

What the SEC DOES require is disclosure of the lock-up terms in the prospectus. The lock-up itself is contractual; the disclosure of its terms is regulatory.

Think of it this way: The SEC's only fingerprint on the lock-up is the requirement that public investors be told about it. The decision to use a lock-up, the length, who is covered, and when waivers can be granted are all bilateral terms between the underwriter and the locked-up holders. The SEC enforces transparency on those terms, not the terms themselves.

Exam Tip: Gotchas

• Lock-ups are NOT SEC-required. They are private contracts between the underwriter and the holders. The SEC's role is requiring disclosure of the lock-up terms in the prospectus, not setting the lock-up itself.
• The lock-up structure, length, and waiver rights are all negotiated, not standardized by regulation. The 180-day IPO standard is industry convention, not a rule.

What Happens at the Lock-Up Cliff?

On the expiration date, a large block of insider stock can be sold into the market. This often produces a short-term price overhang as supply rises and demand has to absorb it.

Bankers manage the cliff in a few practical ways:

• Staggered releases: the underwriter agrees to release insiders in tranches rather than all at once
• Secondary offerings timed to the cliff: an underwritten secondary placement around the lock-up expiration absorbs insider selling through a controlled distribution rather than an open-market dump
• Lock-up extensions: in deals where the post-IPO trading has been weak, the underwriter and holders sometimes negotiate a voluntary extension

Think of it this way: The cliff is a known supply event with a known date. Both the issuer and the underwriter would rather convert that supply event into a managed transaction (a secondary, a tranche, a quiet release) than let it hit the order book as a coordinated sell wave.

Exam Tip: Gotchas

• The lock-up cliff is the EXPIRATION of the lock-up, not its start. The exam can test this through scenarios about stock-price reactions on a specific date after the IPO; the cliff is the date insiders are first eligible to sell.
• A lock-up waiver is NOT the same as the cliff. A waiver is a discretionary early release granted by the underwriter; the cliff is the contractual end of the lock-up period. Waivers are exceptions; the cliff is the rule.

What Should You Check on Exam Day?

• Confirm a lock-up question is testing a contractual term, not an SEC mandate; the SEC only requires disclosure of the terms in the prospectus.
• Distinguish the issuer lock-up (blocks new share issuance) from the shareholder lock-up (blocks existing holders from selling).
• Treat 180 days as the IPO convention, not a regulatory floor; a fact pattern citing 90 or 365 days is still a normal lock-up.
• Verify who holds the waiver right: typically the underwriter, not the issuer or the locked-up holders, but confirm against the fact pattern since it is an agreement term.
• Check whether a scenario describes the cliff (expiration, first eligible sale date) or a waiver (discretionary early release); they are not interchangeable.