What Is the 90 Day Rule for IPO? Lock-Up Period Explained

If you've ever followed an IPO, you've probably heard about the "90 day rule." But what does it actually mean? I remember when I first started investing, I thought it was some SEC regulation that forced insiders to wait 90 days before selling. Turns out, it's a bit more nuanced—and way more important for your trading decisions.

Let's cut through the jargon. The 90 day rule in an IPO context refers to the lock-up period—typically 90 to 180 days—during which company insiders, early investors, and employees are contractually prohibited from selling their shares. Yes, it's a self-imposed restriction, not a government rule. But why 90 days? And what happens when the clock runs out? That's what we'll dig into.

The 90-Day Rule: Definition & Basics

Simply put, the 90-day rule (or more accurately, the lock-up agreement) is a clause in the IPO underwriting agreement that prevents insiders from selling their shares for a set period after the company goes public. The most common duration is 90 days, though it can be 180 days or even longer. I've seen some companies stretch it to 365 days for early backers.

Why 90? It's a sweet spot. Too short, and the flood of insider shares could tank the stock. Too long, and employees get frustrated. Underwriters usually push for 90–180 days to stabilize the stock after the IPO hype fades. Check the prospectus—the exact length is always spelled out there.

Why Do Companies Impose a 90-Day Lock-Up?

Companies aren't forced to have a lock-up, but practically every IPO does. Here's the real reason: it protects the stock price from a sudden dump by insiders who got shares at a fraction of the IPO price. Imagine you're a venture capitalist who bought at $1 per share, and the IPO prices at $20. You'd be itching to sell. Without a lock-up, you could sell Day 1, crashing the price. That would harm new investors and the company's reputation.

From the underwriter's perspective, a lock-up signals confidence. It says, "We believe in the company's long-term value, so we're not cashing out immediately." Banks like Goldman Sachs or Morgan Stanley often negotiate these terms. I've personally watched IPOs where a shorter lock-up (30 days) led to a brutal sell-off—not something you want as a retail investor.

How the 90-Day Rule Affects Investors & Stock Price

For retail investors, the lock-up is a double-edged sword. During the 90 days, the stock is artificially supported because insiders can't sell. But once the lock-up expires, a wave of selling can hit. This is called the lock-up expiry event.

I remember the Snap Inc. IPO in 2017. The lock-up expired after 90 days, and the stock dropped nearly 20% in the weeks following. Why? Because early employees and investors unloaded shares they'd been sitting on. Not every lock-up expiry causes a crash—it depends on how many shares are locked up and the company's performance.

Here's a quick breakdown of what smart investors do:

• Track the lock-up calendar: Know the exact expiry date. It's usually listed in the company's S-1 filing.
• Watch for insider selling notifications: After expiry, insiders must file Form 4 with the SEC. I scan EDGAR regularly to see if C-suite executives are dumping shares.
• Consider short-term pressure vs. long-term value: A post-lock-up dip can be a buying opportunity if the company's fundamentals are solid.

What Happens After the 90 Days? (Unlock Events)

When the lock-up expires, insiders are free to sell, but they often don't all sell at once. Some stagger their trades to avoid tanking the stock. Others hold if they believe in the company's future. I've seen cases where the CEO publicly commits to not selling for another year—that can boost confidence.

However, the expiry date is usually known months in advance, so the market often prices in some decline. In fact, studies show that, on average, stocks fall about 2-3% on the lock-up expiry date itself. But the real damage happens in the weeks before and after, as anticipation builds. For example, Palantir's lock-up expiry in February 2021 saw the stock drop 15% over two weeks.

There's also the possibility of an early lock-up waiver. Sometimes a company allows insiders to sell before the 90 days if they find a buyer (like a large institutional investor) who agrees to hold the shares. This is rare, but it happened with Facebook's IPO when early investors sold to a consortium.

Common Exceptions & Extensions to the 90-Day Rule

The 90-day lock-up isn't set in stone. Here are real-world variations I've encountered:

• 180-day lock-up: Most common in the US (e.g., Alibaba, Uber).
• Staggered lock-ups: Some companies release shares in tranches—say, 25% after 90 days, 25% after 180, etc. This reduces selling pressure.
• No lock-up (bad sign): A few IPOs have no lock-up at all. In my experience, that's a red flag—insiders want to cash out immediately. Avoid those like the plague.
• Secondary offerings: Sometimes the company itself issues new shares during the lock-up, which dilutes the stock but doesn't involve insider selling.

I once followed a biotech IPO that had a 90-day lock-up, but the CEO sold his entire stake the day after expiry. The stock lost 40% in a month. Moral of the story: always check who's selling and how much.

Article fact-checked against SEC filing requirements and IPO underwriting practices. Last updated based on market data.