The popularity of early lock-up releases has risen alongside booming US equities © Michael Nagle/Bloomberg
A record number of US initial public offerings last year allowed founders and early investors to sell shares before the end of a traditional 180-day waiting period.
In 2021, 25 per cent of IPOs — 91 in all — included early lock-up period releases, according to Renaissance Capital. The data excluded stock up-listings and cross listings from other exchanges. These totals were the highest for the period that Renaissance analysed, which dates to 2011. In 2020, 9 per cent — or 17 companies — had early lock-up periods, according to the company.
“It has just skyrocketed,” said Avery Spear, a data analyst at Renaissance. In 2021, two of the five-largest US IPOs included early lock-up releases: Coupang, a South Korean ecommerce business, and Nu Holdings, a Brazilian digital banking platform.
While not regulated, the 180-day lock-up period for IPOs has become standard. Investors have preferred that executives hold shares for about two quarters so that people could become comfortable with new companies. Additionally, investors have worried that executives might have information on the company that they could take advantage of by selling shares early.
Frothy stock markets have prompted companies to break the 180-day lock-up standard before. In 2013, 26 US-listed companies raised $7.4bn from follow-on share sales within the lock-up period, according to Dealogic, the most since the dotcom boom.
The popularity of ending lock-up periods early correlates closely with the stock market’s performance, and early 2022 weakness could damp their use going forward, said Gareth McCartney, global co-head of equity capital markets at UBS.
When IPO shares jump after pricing, there is typically “more leniency around the lock-up because it has done its job, and people are therefore focused on more liquidity”, he said.
Increasingly, the disclosures detailing how lock-up periods expire are becoming more complex, Renaissance found.
The expiry period might be a moving target, based on the share price reaching a threshold. Specifics “are often buried in complex legalese, and may be vague regarding the actual number of shares released”, Renaissance said.
“That makes it absolutely way more difficult” for investors to track, Spear said. “It is not just your clean-cut 180 days post-IPO.”
Benjamin Silverman, director of research at InsiderScore/VerityData, which tracks insider transactions, said investors were “being taken by surprise, saying, ‘wait, why is there downward pressure on the stock?’”
“If you are sensitive to [stock price] swings like that it can be serious and you can be caught off guard,” he said.
Heather Hasson and Trina Spear, co-founders of Figs, which makes stylish medical scrubs, sold $156m of company shares in September after the company’s lock-up period expired early because of the stock’s performance.
Figs’ largest outside shareholder, Tulco Holdings, sold $256m during the same offering in September. For Hasson and Spear, the stock sales “gave them an opportunity to obtain some liquidity after having created billions of dollars of value for Figs’ shareholders”, the company said in a statement. Neither co-founder sold shares at the time of the IPO.
Figs stock closed at $20.96 on Friday, below the company’s IPO price of $22 per share and after soaring as high as $50 per share following the listing.
The record number of early lock-up IPOs does not include mergers with special purpose acquisition companies (Spacs) or direct listings, which also saw a record in 2021 and often allow insiders to sell their stock immediately without restrictions.
Brian Armstrong, chief executive of the cryptocurrency company Coinbase, sold shares worth more than $290m on the company’s first day of trading following a direct listing in April.
Shares in Coinbase have fallen more than 50 per cent from the average price of Armstrong’s stock sales, as the company’s stock has whipsawed with the price of bitcoin.
In December, eight months after the stock sales, Armstrong bought a $133m house in the Bel-Air neighbourhood of Los Angeles that once belonged to Seagram heir Charles Bronfman, the Wall Street Journal first reported. Coinbase declined to comment on Armstrong’s sales.
“You can be cynical and say [founders] are selling into strength,” McCartney said, but “additional stock sales can help improve liquidity without hurting earlier investors if the stock has risen”.