Lockup agreements prohibit company insiders—including employees, their friends and family, and large shareholders—from selling their shares for a set period of time after an IPO.  In other words, the shares are "locked up."  Before a company goes public, the company insiders and its underwriter typically enter into a lockup agreement to ensure that shares owned by these insiders don’t enter the public market too soon after the offering.

The terms of lockup agreements may vary, but most prevent insiders from selling their shares for 180 days. Lockups also may limit the number of shares that can be sold over a designated period of time.  U.S. securities laws require a company using a lockup to disclose the terms in its registration documents, including its prospectus.  

If you are considering investing in a company that has recently conducted an initial public offering, you should determine whether the company insiders have a lockup and when it expires. This is important information because a company’s stock price may drop in anticipation that locked up shares will be sold into the market when the lockup ends.

To find out whether a company has a lockup agreement, review the company’s IPO prospectus.  You can find the prospectus online through the SEC’s EDGAR database.