What is a market standoff or IPO lockup provision?

August 25, 2007

In connection with the initial public offering of a company, the underwriters will generally require the company to prevent their existing stockholders from selling their shares for a certain period after the offering (with 180 days being standard). The purpose of this “market standoff” or “lock up” is to delay the trading of these existing securities until the market can absorb the additional sales after the IPO. To avoid potential disagreements with shareholders immediately prior to the offering, the lock-up provision is typically contained in agreements in connection with every issuance of company stock.

Below is a typical form of lockup provision from an Investor Rights Agreement.

[If requested by the Company and an underwriter of Common Stock (or other securities) of the Company, each Holder shall not] [Each Holder hereby agrees that such Holder shall not] sell or otherwise transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, of any Common Stock (or other securities) of the Company held by such Holder (other than those included in the registration) during the one hundred eighty (180) day period following the effective date [of a registration statement of the Company] [of the registration statement for the Company's Initial Public Offering] filed under the Securities Act [(or such other period as may be requested by the Company or an underwriter to accommodate regulatory restrictions on (i) the publication or other distribution of research reports and (ii) analyst recommendations and opinions, including, but not limited to, the restrictions contained in NASD Rule 2711(f)(4) or NYSE Rule 472(f)(4), or any successor provisions or amendments thereto)] [, provided that: all officers and directors of the Company and holders of at least one percent (1%) of the Company's voting securities are bound by and have entered into similar agreements]. The obligations described in this Section 2.10 shall not apply to a registration relating solely to employee benefit plans on Form S-l or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions and may stamp each such certificate with the second legend set forth in Section 2.8(c) hereof with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of such one hundred eighty (180) day (or other) period. [Each Holder agrees to execute a market standoff agreement with said underwriters in customary form consistent with the provisions of this Section 2.10.]

In more recent forms of lockup provisions, the lockup period may be extended due to rules that prevent underwriters in an IPO from issuing a research report or recommendation on the company within 15 days prior to or after the expiration of a lockup agreement. If the company experts to issue an earnings release within 15 days of the expected release of the lock-up, then extending the lockup period to allow the investment bank to issue an analyst report may be beneficial.

Comments

  • vern

    Hello,

    I purchased shares in a private company without the execution of a market standoff agreement. Many years later, the company is considering an IPO and I am being asked to sign a market standoff. My shares represent far less than 1% of the outstanding shares, and I am not sure I want to wait another 180 days if the company does eventually go public — Do the underwriters typically demand that a small shareholder sign this? If so, is it negotiable?

    Thanks for any insight-

  • http://www.startupcompanylawyer.com Yokum

    As a practical matter, there is probably very little that the company or the underwriters can do to force a shareholder to sign a market standoff agreement if it wasn’t contained in the original stock purchase or other agreement. If a significant amount of shares aren’t locked up, the underwriters may tell the company that they will have difficulty marketing the IPO. In that case, the company may consider taking more drastic measures, such as a merger into a new company, in order to force a lockup upon all shareholders.

    All shareholders typically sign a market standoff with the same terms. The company and the underwriters are unlikely to negotiate with a minor shareholder. If the shareholder does not sign, the company may make it more difficult for the shareholder to sell the shares post-IPO, such as demanding a legal opinion to allow a transfer.

    Most competent counsel will include market standoff provisions in all stock issuance documents to avoid this problem in the future.