What Is a Lock-Up Period in an IPO Subscription?
2 min read · · Korean original
Hello, this is Bitpunk. Today we'll look at what a lock-up period is, a term you'll often come across in IPO subscriptions, and what it means.
What Is a Lock-Up?
A lock-up is a system that restricts major shareholders, such as corporations, from selling their shares for a set period when a company issues new shares. During the lock-up period, the major shareholders' shares are held in custody at a financial institution.
A lock-up prevents large-scale selling after new shares are issued through an IPO or a paid-in capital increase. A lock-up that applies specifically to IPO shares is also called a mandatory holding commitment. The lock-up exists to minimize losses for individual investors caused by falling share prices.
IPO Subscriptions and Lock-Ups
When a lock-up period ends, selling usually begins and the share price generally tends to fall. That's why it's important to check the lock-up details when subscribing to an IPO. The listing price and market capitalization matter, but it's also good to know how much of the total shares is allocated to institutional investors and when the lock-up period ends. In general, the smaller the institutional allocation, the lower the chance that the share price will fall.
Of course, institutions don't sell all their shares just because the lock-up period has ended, and depending on market conditions, the share price may even rise. However, even if institutions don't sell after the lock-up period ends, market sentiment often turns somewhat negative. As a result, share prices tend to fall right before a lock-up expires.
Wrapping Up
The lock-up system restricts major shareholders, such as institutional investors, from selling their shares for a specific period, and it exists to protect individual investors. When subscribing to an IPO or participating in a paid-in capital increase, individual investors should check the volume and timing of locked-up shares, and they may also want to consider market conditions and the lock-up expiration date when deciding when to sell the shares they hold.
