Lock-Up Agreements
At the time of a public offering, underwriters typically require insiders and early investors to sign a so-called lock-up agreement that prohibits them from selling shares for a specific period of time, often 180 days. The underwriter requires such lock-up agreements in order to prevent insiders from dumping the stock and driving down the price before the market has had time to value the shares. Issuers are required to disclose lock-up provisions in all registration documents, including the prospectus. Lock-up provisions do not prohibit insiders from buying more company shares.
Lock-up provisions are not governed by federal securities laws, and underwriters may waive lock-up provisions. Upon lock-up expiration share prices typically drop, often dramatically, as the supply of available shares expands.
In addition, there is a black-out period for the lead manager or co-manager of an offering. Lead managing firms cannot publish research reports within 15 days of the expiration of a lock-up agreement. Nor can research analysts that work for the lead manager or co-manager make public appearances 15 days before or after the expiration of a lock-up period. This rule was put into place to make sure that insiders do not try to promote the security shortly befor