Every time a company goes public, the headline price is set by a small slice of the float – the new shares the underwriters sell on day one. The much larger pool of pre-IPO shares held by founders, employees and venture investors is parked in a freezer for the next several months. That freezer is the IPO lock-up period, and when it thaws, the supply of stock that can hit the tape changes overnight.
TL;DR: A lock-up period is a contractual restriction that bars insiders, employees and pre-IPO investors from selling their shares for a set window after the IPO – typically 90 to 180 days. It is a contract with the underwriters, not a securities law per se, but it stacks on top of SEC Rule 144 holding-period and volume rules and FINRA Rule 5131(d)(2) disclosure requirements. When the lock-up expires, the float can multiply several times in a single day – and stocks have historically tended to drift down into expiration as the market braces for the supply.
What a lock-up actually is
A lock-up period is a private contract between the IPO underwriters and the company’s pre-IPO shareholders. Wikipedia’s description matches the textbook version: “a predetermined amount of time following an initial public offering where large shareholders… are restricted from selling their shares”, and “the IPO lock-up period typically lasts between 90 and 180 days” (Wikipedia: Lock-up period).
The agreement is signed before the IPO prices and is disclosed in the company’s S-1 registration statement on the SEC’s EDGAR system. The typical signers include:
- Officers and directors of the issuing company.
- Founders and early employees holding common stock or vested options.
- Pre-IPO institutional investors – venture capital, growth equity, crossover funds.
- Any other holder of 1% or more of the company, in most underwriting agreements.
The contract does three things at once: it freezes sales of common stock, it usually freezes hedging through options or swaps, and it freezes pledges of the locked-up shares as loan collateral. The point is to stop pre-IPO holders from quietly getting short economic exposure right after the offering and undermining the price the underwriters just set.
The two rule books behind it
Lock-ups are private contracts, but they sit on top of two pieces of regulation that any IPO insider has to think about anyway.
1. SEC Rule 144 – the resale rule
Most pre-IPO shares are “restricted securities” under federal law because they were issued in private placements (employee grants, venture rounds, founder stock). To resell them into the public market without a separate registration statement, holders use Rule 144. Two parts of the rule matter most for newly public companies:
- Holding period. 17 CFR 230.144(d)(1) requires “a minimum of six months” between the acquisition of the securities and their resale for a reporting company (Exchange Act reporting for at least 90 days), and “a minimum of one year” for a non-reporting company.
- Volume cap for affiliates. 17 CFR 230.144(e)(1) limits resales by affiliates in any three-month period to the greater of “one percent of the shares… outstanding” or “the average weekly reported volume of trading… during the four calendar weeks” before the notice of sale.
- Form 144 filing. 17 CFR 230.144(h) requires a Form 144 notice “if the amount of securities to be sold… during any period of three months exceeds 5,000 shares or other units or has an aggregate sale price in excess of $50,000”.
So even after the contractual lock-up ends, affiliates – typically officers, directors and 10% holders – still face Rule 144’s drip-feed volume cap and Form 144 paperwork on every meaningful sale.
2. FINRA Rule 5131(d)(2) – the disclosure rule
If the underwriters want to release insiders from the lock-up before it naturally expires, FINRA gets in the middle. Rule 5131(d)(2) states that “at least two business days before the release or waiver of any lock-up or other restriction on the transfer of the issuer’s shares, the book-running lead manager will notify the issuer of the impending release or waiver and announce the impending release or waiver through a major news service”.
The point is to stop quiet, selective releases that benefit one insider over another and surprise the market. Anyone who has held a recent IPO knows the drill: a wire crosses two days before the early release, the stock often gaps lower, and the released shares start hitting the tape.
The standard 180-day lock-up – a worked example
Picture a software company that IPOs on March 1 with the following capital structure on the day of the offering:
| Holder group | Shares (millions) | % of total | Locked up? |
|---|---|---|---|
| IPO float (sold by underwriters) | 20.0 | 20% | No – tradeable from day 1 |
| Founders & officers | 25.0 | 25% | 180 days |
| Venture investors | 35.0 | 35% | 180 days |
| Employees (vested RSUs & options) | 20.0 | 20% | 180 days |
| Total | 100.0 | 100% |
On IPO day, only the 20 million-share float trades. The other 80 million shares – 80% of the company – sit behind the lock-up.
180 days later, on roughly August 28, the lock-up expires. In theory, the float quintuples overnight: from 20 million tradeable shares to 100 million. In practice, not every locked-up holder will sell day one – founders are often holders for life, venture investors will distribute shares to their LPs in tranches, and many employees are stuck in 10b5-1 trading plans. But the supply available to sell jumps by 5x, and the market knows it for months in advance.
What tends to happen to the stock
This is the part that gets the most attention, and it deserves a careful read.
The most cited academic work is Field and Hanka’s 2001 paper in the Journal of Finance, “The Expiration of IPO Share Lockups” (53(1)), which studied 1,948 IPOs from 1988-1997 and documented statistically significant negative abnormal returns and a permanent jump in trading volume around the expiration date. Brav and Gompers (2003) followed up in the Review of Financial Studies with “The Role of Lockups in Initial Public Offerings”, finding that the post-lockup volume effect was concentrated in venture-backed IPOs. Both papers are well-summarized in the secondary finance literature; the qualitative finding – lockup expiration tends to produce a modest, short-lived price drag and a persistent volume increase – has held up across later samples.
The mechanics are straightforward enough to draw:
Why does the price tend to drift lower into expiration? Three reasons, none of them magic:
- Supply economics. Even if only a fraction of locked-up holders sells, the marginal supply at any given price goes up. With unchanged demand, the clearing price falls.
- Front-running. Short sellers can borrow stock from the existing float and short ahead of expiration, betting that the supply shock will push the price down. After expiration they cover into insider selling.
- Information. If insiders sell aggressively on day one, the market reads it as a negative signal about insider conviction in the company’s prospects.
The effect is usually modest and short-lived. By a few weeks past expiration, the price tends to be back to where the company’s fundamentals say it should be. The lock-up is a supply event, not a fundamentals event.
Variations on the standard lock-up
Not every IPO uses a vanilla 180-day clock. The variants are worth knowing because they change the supply pattern entirely:
| Structure | How it works | When it shows up |
|---|---|---|
| Standard 180-day | Single hard date; all locked shares free at once. | Most US software and biotech IPOs. |
| Staggered (tranched) | A portion releases at 90 days, more at 180 days, the rest at 270 or 365. | Some larger IPOs and direct listings, designed to spread supply. |
| Performance-based | Early release if the stock trades above a defined threshold (e.g., 25% above the IPO price for 10 of 15 trading days). | Higher-profile tech IPOs through the late 2010s and into the 2020s. |
| Direct listing & SPAC mergers | Often no traditional lock-up, or much shorter one – existing shareholders can typically sell from day one (direct listing) or after a short de-SPAC period. | Spotify, Slack, Coinbase-style direct listings; most SPAC mergers. |
| Early waiver | Underwriters cut the lock-up short for some or all holders; FINRA Rule 5131(d)(2) two-day notice applies. | Rare on smaller deals; more common when a secondary offering or block trade is being set up. |
What does a stock chart tend to look like?
The mental picture most traders carry is a small downward drift in the days approaching expiration, an opening gap on the expiration day itself, and a recovery back toward the prior trend over the following weeks – as the supply is digested and trading volume settles at a permanently higher level. The schematic below shows that pattern.
Common mistakes when reading a lock-up
- Assuming the lock-up is the only restriction. Even after Day 180, affiliates are still capped by Rule 144’s 1%-of-shares or weekly-volume drip and must file Form 144 above the 5,000-share / $50,000 threshold. The supply does not all hit at once.
- Treating direct listings and SPACs like traditional IPOs. A direct listing often has no contractual lock-up at all – the supply event is on day one. SPAC sponsors typically have their own lock-up that runs from the de-SPAC merger date, not from the original SPAC IPO date.
- Ignoring early-release wires. When the lead underwriter announces an early release under FINRA Rule 5131(d)(2), that two-day notice is the supply event. The actual expiration date can become a non-event because the market has already adjusted.
- Conflating shares sold with shares unlocked. Even at the largest expirations, many holders never sell. Founders may hold for decades. Venture funds may distribute shares to LPs in-kind instead of selling on the open market, in which case the supply arrives at a wider universe of holders, not as direct exchange pressure.
- Assuming you can short into expiration risk-free. The price drift is well documented but small in expectation and noisy in any single name. In a strong tape, post-lockup performance can be sharply positive.
Where to find the lock-up details for a specific IPO
- Go to the company’s S-1 (or F-1 for foreign issuers) on SEC EDGAR.
- Open the prospectus and search for the section titled “Shares Eligible for Future Sale” or “Lock-Up Agreement”. This is where the duration, the carve-outs, and the early-release triggers are spelled out in plain English.
- The same section usually contains a table showing exactly how many shares become eligible to sell at each milestone date.
- For early-release wires, monitor major news services – underwriters are required to announce them there under FINRA Rule 5131(d)(2).
Related concepts
- How an IPO Actually Works: S-1, Bookbuilding, Greenshoe – the mechanics that set the price the lock-up is later measured against.
- IPO vs Direct Listing vs SPAC Explained – why direct listings and SPAC mergers usually have very different lock-up profiles.
- Secondary Stock Offerings Explained – what often happens after the lock-up: a follow-on block trade that recycles insider supply into institutional hands in one print.
- How Short Selling Works – the other side of the lock-up trade.
Sources
- 17 CFR 230.144 (Rule 144) – holding period, volume limits, Form 144, Cornell Legal Information Institute.
- FINRA Rule 5131 – New Issue Allocations and Distributions, including 5131(d)(2) lock-up release notification.
- SEC EDGAR – company filings search (S-1 / F-1 prospectuses, where lock-up terms are disclosed).
- SEC – Rule 10b5-1 trading plans.
- Wikipedia: Lock-up period (overview of typical 90-180 day duration).
- Field, L. C. and Hanka, G. (2001). “The Expiration of IPO Share Lockups.” Journal of Finance, 56(2), 471-500.
- Brav, A. and Gompers, P. (2003). “The Role of Lockups in Initial Public Offerings.” Review of Financial Studies, 16(1), 1-29.
Disclosure: This article was produced with AI assistance and reviewed before publication. It is for informational purposes only and is not investment advice.