However, those shares can only be sold following a lock-up period. After an IPO, the issuing company becomes a publicly listed company on a recognized stock exchange – often known as the company “going public.” Existing owners of the company’s shares can cash out if they choose to when the company goes public, following an IPO. Prior to an IPO, a company is private – with a relatively smaller number of shareholders, limited to accredited investors or qualified institutional buyers. The IPO process is where a previously unlisted company sells new or existing shares on a stock exchange and offers them to the public for the first time. Sometimes, lock-up periods also serve an additional purpose: they burnish the appearance to the investing public that insiders have long-term faith in the listing company’s prospects. As a result, their selling activities could significantly impact a company’s share price immediately after the company goes public. Insiders, compared to the general public, own disproportionately high percentages of stock shares at the time of an IPO. These lock-up agreements are commonly used as part of the Initial Public Offering (IPO) process and to protect a new stock from heavy insider selling - flooding the nascent market for the company’s shares and driving the price down. The decision to enter into lock-up agreements is usually made by the underwriter. There are no federal laws governing lock-up agreements these are instead usually determined by the underwriters and the issuer and its directors, officers and control persons in connection with offerings of securities. A lock-up agreement is a legal agreement signed by all the shareholders of a company, which restricts them from selling any shares of the company’s stock for an agreed period of time.
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