IPO Investors: Beware the Quiet Period and Lockup Expirations

By: Spencer Israel

Whether you want to call it “The Year Of The Unicorn,” “The Year Of The Unicorn Reckoning,” or something else, 2019 may well go down as a milestone year in the IPO record books. And not so much for the number or size of IPOs, but because of who went public.

Ninety-one companies held an IPO in the first three quarters of 2019, the vast majority of them unprofitable. These unprofitable companies have combined to raise approximately $29.9 billion this year according to Bloomberg, or about 78% of the total IPO pie. With two and a half months still to go in the year, we’ve already set a record for capital raised by unprofitable IPOs.

Much of the IPO conversation in 2019 has centered around the unicorns, privately held companies valued at over $1 billion. There have been 16 unicorn IPOs through the first three quarters of 2019—Beyond Meat, Uber, Lyft, Peloton, SmileDirectClub, Luckin Coffee, Pinterest, Zoom, Slack, CrowdStrike, Dynatrace, PagerDuty, Fiverr, Tradeweb, Chewy, and Datadog.

For context, only five unicorns IPO’d in 2018.

The vast majority of these unicorns have underperformed in the public markets, as investors have begun to come to grips with inflated private valuations (the unluckiest of the bunch, WeWork and Endeavor, weren’t even able to get their IPOs off the ground).

This relative influx if large IPOs, and their subsequent underperformance as public companies, makes it a good time to remember the two most important dates to be aware of after a company goes public: the quiet period expiration and lockup expiration.

Quiet Period

In the context of IPOs, companies are subject to a quiet period both before and after the IPO date. For company executives, this is an SEC-mandated period of 40 days in which they are prohibited from offering new information that isn’t already available to the public via the S-1 filing.

There’s also a quiet period in terms of research reports that can be released about an IPO. While there is no set deadline, sell-side analysts whose firms participated in the IPO underwriting process typically do not publish anything for 20-30 days after the IPO date. The purpose of this is to prevent the potential conflict of interest of a bank disseminating positive opinions about a stock shortly after having just been allocated a piece of the IPO.

Once this analyst quiet period is up, it’s not unusual for most major underwriters to come out with research reports and ratings on the same day. In the case of the largest IPOs, like Lyft below, some of the largest banks on Wall Street helped underwrite the offering. Oftentimes, the influence that these banks carry on Wall Street, combined with the sheer quantity of research being made public can drive a stock higher or lower.

On the morning that Lyft’s analyst quiet period ended, the stock opened up nearly 2% on no other news.

Lyft’s quiet period ended on April 23, 2019, after which 11 underwriters-initiated sell-side coverage of the stock

Even if a newly minted IPO receives a flood of positive comments from analysts, that is not necessarily a guarantee that the stock will move higher.

Take Pelton for example. The analyst quiet period ended on Oct. 21, after which the stock received 15 bullish initiations from analysts. And while shares of PTON opened 2% higher that day, they ended up closing down 7%. In this case, traders were not sold on the sell side’s bullishness.

Peloton’s quiet period ended on Oct. 21, 2019, after which 15 underwriters-initiated sell-side coverage of the stock

Lockup Expiration

We’ve written before about lock-up expirations and how to trade them. Lockups are the period in which company insiders (including executives and those that were allocated shares of the IPO) are forbidden from selling their shares on the public markets.

Most IPOs have a lock-up period ranging anywhere from 90-180 days after the offering date, though the exact date can be found in the company’s S-1.

While there’s no guarantee that any insider will sell once the lock-up expires, the fact that they can is enough of a catalyst that entire trading strategies are centered around this. Some companies, like Alibaba and Facebook, saw added volatility in the days leading up to and after their lockups.

The SEC’s Edgar site is a great source to track upcoming lockup expirations.

Both of these known dates can be volatility events for newly public companies. Short-term traders and long-term IPO investors alike would be wise to have them circled on their calendar.

The author has no positions in any of the stocks mentioned.

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