An investor is often forced to avoid selling purchased shares/units within a certain time frame per the offering documents, such as a stock purchase agreement or subscription agreement (such restriction is also often mirrored in the private placement memorandum).
The key rationale and concern is to guard against ruining a public offering by the issuer company by private investors dumping or flooding the market with their shares/units.
As a result, underwriters often will demand the company prevent its private equity investors from selling until a certain period following the IPO, for the same reasons (that lock up period is usually set at 180 days).
Hence, rather than leave things to chance, a smart issuer will implement a standoff or “lock up” clause at the time of the offering.
Failure to do so can hurt its IPO, or worse, prevent an underwriter from underwriting the IPO.
Again, careful planning for the future fundraising needs of the company must be undertaken when conducting a private placement.
An issuer that focuses only on the short term can miss key provisions such as a market standoff. Moreover, if the issuer’s goal is to go public at some point, it should leverage counsel and advisors that know the implications of a public offering following several rounds of private capital raises.
Indeed there are key differences between project finance (i.e., financing a one time real estate project), versus ongoing business concerns (i.e., a technology or other services company) that can greatly affect the language of the offering documents in this regard.
A typical Market Standoff / IPO Lockup provision is set forth below:
MARKET STANDOFF PROVISION. The Subscriber hereby agrees that, if so requested by the Company or any representative of the underwriters (the “Managing Underwriter”) in connection with any registration of the offering of any securities of the Company under the Securities Act, the Subscriber shall not sell or otherwise transfer any Securities or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the “Market Standoff Period”) following the effective date of a registration statement of the Company filed under the Securities Act.
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The Company may impose stop-transfer instructions with respect to Securities subject to the foregoing restrictions until the end of such Market Standoff Period.