The IPO Lock-Up Period

Before you get involved in an initial public offering, learn how IPOs work.

Motley Fool Staff
Motley Fool Staff
Sep 22, 2006 at 12:00AM
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When a company goes public, its insiders can't sell their shares for a certain period of time called the lock-up period. It typically runs for 90 days to a year and offers outside investors some measure of protection. If the newly public firm has some skeletons in its closet, insiders who know about them can't act on their "inside" knowledge and quickly sell shares before the public learns the bad news. Some companies set extra-long lock-up periods, to show their faith in the company and to inspire confidence in public shareholders.

So if you've been checking for insider sales and haven't seen any for a newly public company that you have doubts about, don't take that as a necessarily good sign. The insiders may simply be preparing to unload many shares as soon as they can.

In general, your friends at The Fool recommend that investors steer clear of IPOs, or at least think twice before investing in them. IPO stocks don't necessarily fare well in their first year or so, and you can often do better focusing on firms with more established track records.

For more info on IPOs and how they work, read "The ABCs of IPOs" and our IPO FAQ.

Some companies that recently had their IPOs and which you might want to keep an eye on include Chipotle Mexican Grill, Morningstar, SunPower, Fastclick, Nucryst Pharmaceuticals, Tim Hortons, andBurger King.

And here are some recent Fool articles on the topic: