Lock-up Periods and Blackouts: A Primer for Pre-IPO Companies

Aunalisa Arellano

Illustrations of two people discussing IPO lockup periods and insider selling.

Building a Culture of Ownership

Few milestones can fill a private company with equal measures of excitement and anxiety than the prospect of going public. With access to a huge new source of capital, you can get the runway you need to hit your most aspirational growth objectives. But it’s no secret that public companies need to follow a wide range of strict rules – including those that govern how and when your founders, executives and employees are allowed to sell company shares.

What are the rules around buying and selling shares right after going public? In what cases might your executives or employees be prohibited from buying or selling shares? And how can insiders ever sell shares if they’re in possession of material, non-public information?

A look at lock-up periods

There are probably few things as amazing as selling your company’s shares on the public markets for the first time. Thanks to lock-up periods, however, the first time a company insider can sell shares will likely be months after your IPO.

As agreements negotiated between underwriters and new issuers, lock-up periods explicitly prevent insiders – including founders, executives and employees – from selling any pre-owned shares when the company goes public which typically last for 90 to 180 days.

The rationale behind lock-up periods is pretty simple. Your underwriters, want to prevent high-volume insider selling right out of the gate. After all, if insiders start inundating the market with their shares, your company’s share price is bound to suffer and it may raise questions about the commitment of those selling to the company. With a lock-up period in place, insider selling is delayed.

Does this mean that pre-existing shareholders can freely sell their shares as soon as the lock-up period expires? Well, not exactly.

Blackouts and insider trading

Even after a lock-up period expires, executives and employees are prohibited from selling their shares during a company blackout period or when they may have any material non-public information.

Like lock-up periods, blackouts are pre-set periods of time during which certain people aren’t allowed to buy or sell company shares. The most common types of blackouts occur four times each year before a public company releases its quarterly earnings. Although blackouts theoretically would only apply to people who have advance knowledge of corporate earnings, in practice blackout periods usually apply to all company employees.

The length of time blackout periods last depends on internal company policies. As a rule of thumb, blackouts start as soon as a company begins preparing its financial statements and end two days after the results are released. This can run anywhere from 30 to 60 days each quarter.

If you do the math, it quickly becomes apparent that employees often have fairly limited open windows during which they’re allowed to sell their shares. And for some employees, those windows are even narrower. Specifically, insiders are never supposed to sell their shares when they have access to material, non-public information.

Material information is anything that might affect a company’s share price, such as quarterly and year-end financial results, any planned mergers or acquisitions, major new contracts, significant supply chain disruptions, important research findings, pending litigation or even major personnel changes. Material information is considered non-public if the company hasn’t issued a formal report or news release to share it.

To discover how Shareworks can support you throughout your going public journey, be sure to get in touch!

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