IPO lockup is a period of time following an IPO or SPAC acquisition during which pre-IPO shareholders are prohibited from trading their shares. A lockup agreement may also limit the number of shares that a pre-IPO shareholder can sell within a certain period of time. Lockup periods are not mandated by the SEC; however, pre-IPO startup companies and their underwriters typically require them. If you hold pre-IPO shares in your company, understanding how the lockup period works is critical for developing a strategic tax and financial plan.
The lockup period and its associated rules are established in the underwriting agreement, which insiders must sign before the company may move forward with IPO. If parties to this agreement violate its terms by trading or attempting to trade shares before the end of the lockup period, they may be subject to fines or other consequences at the company level. Each underwriting agreement contains its own specific terms, so make sure that you understand the provisions of yours.