The goal of a lockout agreement is to prevent corporate insiders from throwing their shares at new investors in the weeks and months following the IPO. Some of these insiders could be early investors, such as venture capital firms, who made their purchases in the company when it was worth significantly less than its IPO value. They may therefore have a strong incentive to sell their shares and make a profit from their initial investment. In the event of the sale of a controlling interest, the purchaser must temporarily consent to a blocking clause. It prohibits the resale of assets or shares for the duration of the agreed suspension period. This measure is intended to maintain price stability for other stakeholders. Insiders could still be prevented from selling their shares at the end of the prohibition period. This can happen when an insider has access to essential, non-public information for which the sale of shares would constitute insider trading. Such a scenario could occur if the end of the closing period coincides with the results season. When a technology company goes public, its insurers generally require all directors, executives, employees and investors prior to the IPO to enter into containment agreements that they prohibit for a period of time, including the sale of shares acquired prior to the IPO. Historically, these blackout periods have tended to last 180 days.

Investors need to know if there is a blocking agreement, as the likelihood of a price crash after the locking contract expires is high. Always look at the blocking period before investing in an IPO. The blackout periods usually last 180 days, but can sometimes last up to 90 days or a year. Sometimes all insiders are “blocked” for the same period. In other cases, the agreement will have a staggered blocking structure, in which different insider classes will be blocked for different periods. Although federal law does not require companies to use blackout periods, they can still be imposed by state blue sky laws. A blocking agreement is a contractual clause that prevents a company`s insiders from selling their shares for a specified period of time. They are often used in the IPO. Details of a company`s lockout agreements are always disclosed in prospectus documents for the company concerned.

These can be saved either by contact with the company`s investor relations department or through the Securities and Exchanges Commission`s (SEC) Electronic, Analysis, and Retrieval (EDGAR) database. The main objective of an IPO blocking phase is to prevent large investors from flooding the equity market, which would initially lower the share price. Simply put, the company`s insiders tend to hold shares that are disproportionate to the community.