When it comes to investing in IPOs, it is helpful to know the closing periods for the IPO. Traditional IPOs come with a wide range of trading rules and restrictions. It was set up to protect investors and provide some trading stability.
To get started, let’s look at a short definition of underwriting closing periods. Then below, you’ll find where to find the details of the closure agreement, as well as why it should be used. It is important for investors to take into account…
What is the subscription lock period?
The IPO lockout period prevents company insiders from selling their shares for a period of time. In other words, posts are “closed”. This typically applies to company founders, owners, directors, and employees. In addition, it can apply to venture capitalists and other investors prior to the IPO.
You will often notice closing periods between 90 and 180 days. Most trading restrictions are lifted after the subscription lock period ends. Although every deal is a little different. So, before investing, it is a good idea to read the finer details…
Why do we use lock periods?
The IPO closing period reduces selling pressure. This is because the stock is usually very volatile in the first few months after the IPO. By making early investors wait, there is more time for the stock price to stabilize in the market.
The closing period also prevents investors from flooding the market with too many shares when the company goes public. Usually, insider investors buy their shares at a price lower than the IPO price. As a result, they may be more inclined to sell their shares after the IPO, which could hurt the company’s success. For example, a major shareholder who sells their holdings immediately after the company’s debut may cause his share price to fall.
To reduce selling pressure and flood the market, investment banks that underwrite an IPO usually require a contractual closing period. Here you can find the details of the closing agreement…
Find lock agreement details
You must determine whether or not the company has a lock and when it expires before investing in a company that has gone public. You can find this information in the company’s prospectus. This is a file with the Securities and Exchange Commission (SEC). It gives a deep insight into the company that will be going public.
You can search for public company filings on the SEC.gov website. In the United States, public companies offer S-1. However, the government requires foreign companies listed in the United States to file a Form F-1.
You should know that IPO closing periods are not mandated by the Securities and Exchange Commission or any other regulatory body. Instead, the closing period is usually self-enforced by the company undergoing the IPO or required by the IPO underwriters.
Less traditional underwriting methods have become increasingly popular in recent years. For example, many companies now choose to roll it out to the public via SPACs. However, there is also a closing period for SPAC IPOs that differ from traditional IPOs…
Lock period for SPAC IPO vs. Standard IPO
There has been an increase in Special Purpose Acquisition Companies (SPAC). However, you should know that the closing period can be longer for a SPAC IPO than for a traditional IPO. SPAC IPO closings generally last from 180 days to one year, compared to 90 to 180 days for standard IPOs.
However, SPAC’s sponsors and company shareholders are subject to different closing periods. By legal yardstick, most SPACs from 2019 and early 2020 revealed that SPAC sponsors are often subject to a one-year ban period. Conversely, the target company’s shareholders often agree to a 180-day closing period.
Despite this, there are differences in the periods of confinement. SPAC sponsors may be subject to shorter closing periods if certain pricing triggers are met and the company’s stock price reaches certain levels.
For example, this happened when DraftKings merged with SPAC Diamond Eagle Acquisition Corp. (DEAC). Initially, the founders and directors of DEAC were subject to a one-year confinement period. However, the stock has traded more than $15 for 20 out of the 30 consecutive trading days. Therefore, the terms of the closing agreement were met, and the closing period was shortened.
Closing periods are always applied to companies that go public. However, some companies avoid closing periods by direct listing. lets take alook…
Avoid booking periods with direct listing
In recent years, the less traditional IPO method has gained more popularity. Some companies will enter the public markets through the direct listing process.
In direct listing, the company sells the shares directly to the public without the help of intermediaries. In other words, there are no traditional guarantors involved. It bypasses the steps of banking support for a traditional initial public offering. In addition, existing shareholders only sell their shares on public stock exchanges. No additional posts are publicly available.
Direct listing is a way for a company to do public advertising without restrictions. In addition, some companies choose live listings because they can speed up the process of getting them to the public. Despite this, coming up with a generic name through direct listing is often ideal for established companies with a loyal client base. These companies are usually popular among investors and do not need additional exposure.
You can learn more about offering public shares through direct listing versus public offering here.
What happens after the subscription lock period ends?
Since investors know the closing period in advance, they can also plan accordingly. With the closing date approaching, traders often anticipate a price drop due to the additional supply of stocks available in the market.
After the closing period ends, restrictions increase that prevents insiders from selling shares. Informed investors can then sell their shares after the subscription lock period has expired. However, it varies for each subscription. Sometimes corporate insiders cannot sell their shares after the closing period has ended. Due to the fact that they have material information that is not public, the sale will constitute insider trading.
The last line in the subscription closing period
The closing period usually does not prevent individual investors from selling shares because they are not working for the company and have not received the shares as compensation. Despite this, lockdown periods can still affect you in the long run.
Since a company’s stock price usually drops towards the end of the closing period, remember to do your research before investing. Oftentimes near the end of the holding period, investors can take advantage of a drop in stock prices to “buy the dip.” Moreover, not only can you take advantage of a potential price drop, but you can also prevent losing money if the stock loses its value.
This is just one piece of the puzzle to be put to the public. To learn more about the full subscription process, check out this link as well. It gives you a step-by-step guide for publishing to the public.
However, be sure to do your research before investing. It is important to keep track of when corporate insiders sell their shares. This may be an indication that the company is not worth investing in.
Furthermore, if investing in an IPO piques your interest, check out our top IPOs and our IPO calendar. We update the calendar daily to give you the latest news on upcoming and deposited IPOs.
About Amy Bon
Amy Boone graduated from the School of Business and Economics at Towson University. Her background in marketing research helps her uncover valuable trends. Research into initial public offerings and other trends has been her primary focus over the past year. When you’re not writing Aimee for Investment U, you can usually find her doing graphic design or traveling with friends.