Investors need to know if there is a blocking agreement, as the probability of a drop in the share price is high when the blocking agreement expires. From a regulatory perspective, blocking agreements aim to protect investors. The scenario that the blocking agreement is designed to avoid is a group of insiders who take a public overvalued company and then throw it at investors as they run away with the product. For this reason, some Blue Sky laws still have blockages as a legal obligation, as this has been a real problem during several periods of market exuberance in the United States. A lock-in period usually lasts 180 days or six months, but can last from four months to a year. Because there are generally no federal lawsSafe and Exchange Commission (SEC)The U.S. Securities and Exchange Commission (SEC) is an independent agency of the U.S. federal government responsible for implementing federal securities laws and proposing securities rules. It is also responsible for maintaining the securities industry and trading for lock-in arrangements, the decision on the duration is usually made by the underwriter. Studies have shown that the expiration of a blocking agreement is usually followed by a period of abnormal returns. Unfortunately for investors, these abnormal returns are more often in the negative direction. The purpose of a blocking agreement is to prevent corporate insiders from selling their shares to new investors in the weeks and months following an IPO.
Some of these insiders could be early investors like the venture capital firms that bought the company when it was worth much less than its IPO value. As a result, they may have a strong incentive to sell their shares and profit from their initial investment. Blocking agreements are intended to protect investors. The blocking agreement aims to avoid a scenario in which a group of insiders makes an overvalued company public and passes it on to investors, with profits running away. People who plan to invest in the business need to determine when the lock-in period ends. This is because insiders who sell some of their shares can exert downward pressure on the company`s shares. Similarly, officers and certain employees may have received stock options under their employment contract. As with venture capital firms, these employees may be tempted to exercise their options and sell their shares, as the price of the company`s IPO would almost certainly be much higher than the exercise price of their options.
Underwriters and IPO insiders agree on freezes to prevent insiders from opportunistically selling their shares within a certain period of time. Before a company is allowed to go public, underwriters require insiders to sign a blocking agreement. The objective is to maintain the stability of the Company`s shares in the first months following the Offer. The practice ensures an orderly market for the company`s shares after the IPO. This gives the market enough time to determine the true value of the stock. It also ensures that insiders continue to act in accordance with the company`s objectives. 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 locks expire, company insiders are allowed to sell their shares. If many insiders and venture capitalists are looking for an exit, it can lead to a drastic drop in the share price due to the huge increase in stock supply.
Blocking periods typically last 180 days, but can sometimes be as short as 90 days or as long as 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 blackout periods, they may still be required under state Blue Sky laws. Although lock-in agreements are not required under federal law, underwriters often require executives, venture capitalists (VCs) and other company insiders to sign lock-in agreements to avoid excessive selling pressure in the first few months of trading after an IPO. The blocking agreement may contain additional clauses that limit the number of shares that can be sold for a certain period after the end of the blocking agreement. Such clauses help prevent a significant drop in stock prices, which could result from a huge increase in supply. 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. Before an IPO, a company is considered a private company, usually with a small number of investors (founders, friends, family and business investors such as venture capitalists or angel investors). Find out what an IPO is that prohibits them from selling their shares for a certain period of time. These people may include venture capitalists, corporate directors, the Company`s board of directors is essentially a body of people elected to represent shareholders.
Every public limited company is legally obliged to establish a board of directors; Not-for-profit organizations and many private companies – although it is not mandatory – also establish a board of directors, managers, executives, employees and their family and friends. Blocking agreements are relevant for investors because conditions can affect the share price. After the blocks expire, people subject to restrictions are allowed to sell their shares. If a significant number of insiders withdraw, it can lead to a drastic drop in the share price. The freeze agreement helps reduce volatility pressures when the company`s shares are in the first few months. Only after the blocking period has expired are insiders free to sell. A hostile takeover in mergers and acquisitions (M&A) is the acquisition of a target company by another company (called an acquirer) by passing directly to the shareholders of the target company, either through a takeover bid or by proxy vote. The difference between a hostile and a friendly sometimes explores a similar path. Restricted or “blocked” stakeholders can only sell their shares after the lock-in period has expired. This avoids the opportunistic behavior of some insiders who want to sell the shares at a lower price. Of course, an investor can look at this in two ways, depending on their perception of the quality of the underlying business. The post-lock-up decline, if it actually happens, can be an opportunity to buy stocks at a temporarily depressed price.
On the other hand, this is perhaps the first sign that the IPO has been overvalued and signals the beginning of a long-term decline. When selling a majority stake, the purchaser of the company must temporarily accept a barrier clause. It prohibits the resale of assets or shares for the duration of the agreed lock-up period. The aim is to maintain price stability for other stakeholders. Details of a company`s blocking agreements are always disclosed in that company`s prospectus documents. These can be secured either by contacting the Company`s Investor Relations department or via the Securities and Exchanges Commission`s (SEC) Electronic Data Gathering, Analysis and Retrieval (EDGAR) database. A blocking agreement is a contractual provision that prevents insiders of a company from selling their shares for a certain period of time. They are often used as part of the initial public offering (IPO). Interestingly, some of these studies have found that multi-level blocking agreements can actually have a more negative impact on a stock than those with a single expiration date. This is surprising because multi-level lock-in agreements are often seen as a solution to post-lock down. to take your career to the next level! Learn step by step from professional Wall Street instructors today. CFI is the official provider of the global FMVA Financial Modeling & Valuation Analyst (FMVA) certificationJoint ™® 350,600+ students working for companies like Amazon, J.P.