Lockup Expirations Explained: 180-Day Lockups, Early Releases and Leak-Outs

The short version

A lockup is a contractual promise by existing holders not to sell (or hedge) their shares for a set period after an offering. In a US IPO, officers, directors, employees and pre-IPO investors typically agree with the underwriters not to sell for 180 days after the offering, although shorter and longer periods are used. When the period ends, those shares can generally be sold, subject to securities law limits such as Rule 144.

The lockup expiration does not create new shares. It changes how many existing shares are eligible to be sold, which can enlarge the tradable supply relative to the public float from the IPO. A leak-out agreement is a related tool that, instead of banning sales outright, caps how much a holder can sell over a period.

How a lockup works

Lockups are private agreements, usually between each locked-up holder and the lead underwriters. No SEC rule requires one, but almost every underwritten IPO has them, because underwriters want an orderly market for the newly issued shares. A typical lockup:

• Covers common stock and securities convertible into it, such as options and warrants, plus short sales, swaps and other hedges that would transfer the economic risk.
• Runs from the date of the final prospectus for a fixed period, commonly 180 days for an IPO, and often 60 to 90 days for a follow-on offering.
• Permits listed exceptions, such as gifts, transfers to family trusts, and sales under pre-existing trading plans.
• Can be waived by the underwriters, in whole or in part.

A worked example

Hypothetical Company X completes an IPO, selling 10,000,000 new shares. It already had 40,000,000 shares held by founders, employees and venture investors, all locked up for 180 days.

Hypothetical figures, before any affiliate restrictions under Rule 144.

Where lockup terms are disclosed

The final prospectus, filed as a 424B4 for most IPOs, is the primary source:

• "Underwriting" describes the lockup agreements, their length, who signed and the exceptions.
• "Shares Eligible for Future Sale" sets out how many shares become sellable and when, including the effect of Rule 144.
• The underwriting agreement, filed as an exhibit to the registration statement, contains the full lockup terms.

Counting 180 days from the prospectus date gives the scheduled expiry, but some lockups end on a different trigger, such as a set number of trading days after an earnings release.

Early releases and waivers

Lockups often contain built-in early release provisions. Common forms include:

• Price-based release. A portion of locked shares is released if the stock closes above a set premium to the IPO price (for example 25% or 33%) for a set number of trading days.
• Earnings-based release. A portion is released shortly after the company reports results, often so that holders are not stuck in a closed trading window when the lockup ends.
• Staged release. Fixed percentages unlock at different dates.

Underwriters can also grant discretionary waivers. Under FINRA Rule 5131(d)(2), lockup agreements for officers and directors must provide that, at least two business days before a release or waiver, the lead manager notifies the company and the release is announced through a major news service. A natural expiration already disclosed in the prospectus does not require a new announcement.

After expiry: Rule 144 and insider reporting

Expiry removes the contractual barrier. Securities law limits still apply:

• Restricted securities acquired before the IPO generally must meet Rule 144's holding period (six months for a company that has been reporting for at least 90 days, one year otherwise) before public resale without registration.
• Affiliates, such as officers, directors and large holders, are subject to Rule 144's volume limit: in any three months, no more than the greater of 1% of shares outstanding or the average weekly trading volume over the prior four calendar weeks. Affiliates selling more than 5,000 shares or $50,000 in three months file a Form 144.
• Officers, directors and 10% holders report sales on Form 4 within two business days.

For Company X, 1% of outstanding is 500,000 shares. If average weekly volume is 2,000,000 shares, an affiliate can sell up to 2,000,000 shares in a three-month period under the volume limit.

Leak-out agreements

A leak-out agreement limits selling rather than prohibiting it. Typical terms cap a holder's daily sales at a percentage of the stock's daily trading volume, or a fixed number of shares per day or week, for a set period. They are common in PIPE transactions, convertible financings and resale registrations, where a selling shareholder receives shares that could otherwise be sold all at once.

For example, a leak-out capped at 10% of daily volume, on a day when 3,000,000 shares trade, permits sales of up to 300,000 shares that day.

How to track lockups on Signal8

• The market calendar shows scheduled corporate events, including lockup-related dates where available.
• The live SEC filings feed shows the 424B4 prospectuses where lockup terms are disclosed, and the Form 4 and Form 144 filings that follow.
• The insiders pages collect Form 4 transactions by insider and company.

For how new and newly sellable shares affect ownership, see What Is Dilution?.

FAQ

How long is a typical IPO lockup period?

The most common IPO lockup is 180 days from the date of the final prospectus. Shorter periods, such as 90 days, and longer or staged lockups also appear, and follow-on offerings commonly use 60 to 90 days. The exact length, the holders covered and the exceptions are disclosed in the "Underwriting" section of the prospectus and in the underwriting agreement.

Does a lockup expiration create new shares?

No. A lockup expiration does not change the number of shares outstanding. It allows existing shares that were contractually restricted to be sold, so the number of shares that could trade increases. Securities law limits such as Rule 144's holding period and affiliate volume limits can still restrict sales after the lockup ends.

Can a lockup end early?

Yes. Many lockups include early release provisions tied to the stock price, an earnings release or a set schedule, and underwriters can waive a lockup for some or all holders. FINRA Rule 5131 requires a release or waiver for officers and directors to be announced through a major news service at least two business days before it takes effect.

What is a leak-out agreement?

A leak-out agreement limits how much stock a holder can sell over a period rather than prohibiting sales. Typical terms cap daily sales at a percentage of trading volume or at a fixed number of shares. Leak-outs are common in private placements and convertible financings, where investors receive shares that could otherwise be sold in a short time.