2019 has been a big year for unicorns making their public market debut, from Uber and Lyft to Pinterest and Peloton. Both Pinterest and Uber’s lockups recently expired, and a common question we have received from investors around lockup expiration is the status of their shares. In this blog, we’ll give you a refresher on what a lockup period is, how restricted securities are handled, and what post lockup conversion looks like.
What is a Lockup Period?
A post-IPO lockup period is a set time frame in which insiders and other existing pre-IPO shareholders are prohibited from selling or redeeming their shares in a company after its IPO. These shareholders can include owners, founders, corporate insiders, employees, and private investors. The impetus for this is to reduce share price fluctuations directly following an IPO, which can happen when existing shareholders are eager to cash in, flooding the market with new shares. By keeping these shares locked up, major price fluctuations may be avoided directly following an IPO.
Lockups are not required under regulatory law but are often included as a term of the underwriting bank’s contract. Lockup periods only apply to IPOs, not direct listings (DPOs). Typically, they last for 180 days, or six months, although they may be as short as 90 days, or three months.
Lockup Expiration and Implications
Once the lockup period expires, things can go one of two ways: new shares could flood the market, driving prices down, or just the opposite, where shareholders hang on to their shares, driving prices up.
For investors like ours, who acquired their shares on the secondary market pre-IPO, access to shares is not immediate upon expiration because they are subject to the rules and regulations of restricted securities. Before we get into the process that goes on behind the scenes to get investors their shares, it’s important to have a basic understanding of what it means for a security to be restricted.
Restricted securities are typically purchased in unregistered, private sales from either an issuer or an affiliate of the issuer. They cannot be transferred or sold until the restriction is lifted.
There are many different types of restricted securities, but in the context of lockup expiration, two major types of restricted securities are:
- Private Placement: Securities are sold either by the issuer or an affiliate of the issuer in a private transaction
- Accredited Investors: Securities purchased from the issuer are subject to the resale limitations of the Securities Act of 1933 Rule 502(d) or Rule 701(c)
Securities that are subject to lockup restrictions will be marked as such to prevent unauthorized sale or transfer before the lockup has expired.
Before the IPO occurs, the issuer will initiate a contract with a transfer agent to hold those lockup shares in the name of all their employees, secondary shareholders, etc. Closer to the lockup expiration, the transfer agent takes down all of our account information. Once lockup expiration day has arrived, the process looks something like this:
- We request shares for our fund from the transfer agent, joining the queue of all the others who are also requesting shares.
- Depending on how speedy the transfer agent is, we could receive our fund’s shares within a week or less, but sometimes it takes more time.
- Once those shares hit our account, we can begin allocating them to investors.
If you have additional questions about the status of your lockup shares or the lockup expiration process in general, please don’t hesitate to reach out to our investor relations team, they are always happy to offer assistance.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.