Usually, employees and early investors want shorter blocks (so they can pay earlier), while underwriting banks want longer freezes (to prevent insiders from flooding the market and lowering the share price). The company is often somewhere in the middle – it wants to make employees and investors happy, but not that it seems that insiders don`t trust it. Even if there is a blocking agreement, investors who are not company insiders can still be affected once this blocking agreement has passed its expiration date. When the blocks expire, company insiders are allowed to sell their shares. If a lot of insiders and venture capitalists want to get out, it can lead to a drastic drop in the share price due to the huge increase in the supply of shares. Therefore, a lock-in agreement between insiders and underwriters ensures that share prices remain stable and that the company`s public offering proceeds smoothly. It is important to remember that floating is of great importance during an IPO. Float is the number of shares that are still available for public trading, i.e. that are not blocked by the blocking agreement. The small free float is subject to greater volatility because a company with a large share order may decide to sell and therefore affect the share price after the blocking agreement expires. A larger free float ensures that the stock is less volatile. Although lock-in agreements are not required under federal law, underwriters often require executives, venture capitalists (CVs) and other company insiders to sign lock-in agreements to avoid excessive selling pressure in the first few months of trading after an IPO. Prohibition periods usually last 180 days, but can sometimes last as little as 90 days or up to a year.
Sometimes all insiders are „locked“ during the same period. In other cases, the agreement will have a multi-level lock-in structure in which different categories of insiders will be locked for different periods. While federal law does not require companies to enforce prohibition periods, they may still be required under state Blue Sky laws. A blocking agreement is a legal agreement signed by all shareholders of a company and prevents them from selling shares of the company for an agreed period of time. This agreement is signed by all shareholders of the company, including officers, directors, managers, etc. A blocking agreement is usually signed during an IPO of the company. The agreement ensures that the Company`s share prices are stable during the first few months. Restricted stakeholders may sell the shares after the end of the term of the blocking agreement.
A lock-up agreement refers to a legally binding contract between the insiders and underwriters of a company at its initial public offering (IPO). An initial public offering (IPO)An initial public offering (IPO) is the first sale of shares issued to the public by a company.