Picking the Lockup Knot

Lockup expiration, the first time after an IPO when insiders can sell stock, has become an important stock-trading tool. But figuring out when lockups expire is no simple task.

Several online sites carry information about lockup expirations, but none is a foolproof guide. EDGAR Online and IPOLockup.com publish charts that list IPOs and 180-day lockup expirations. But they don't include the number of shares that could hit the market, nor do they include 90-day lockups. Some companies also stagger the release of shares, unlocking a number of shares after a quarterly report or other event. So, in many cases, figuring out lockups requires a closer look.

Investors may want to pore over Securities and Exchange Commission filings. It's time-consuming, but so far is the only way to get comprehensive information. Here's how it's done.

Go to EDGAR Online, a subscription service that provides access to SEC documents, or the SEC's site, which is free. Get a list of SEC filings by entering the company name or ticker symbol in the search box (on the SEC site, search by the company's name). Look for the most recent document labeled 424B -- this is the final prospectus, and it will be numbered from 1 to 5 (424B1, 424B2, etc.). Don't confuse this form with a company's S-1, which is an initial prospectus filed when the company officially decides to sell stock to the public.

Always refer to the most recent 424B form. It's possible the company has done a secondary stock offering since the IPO, in which case the lockup provision may change and will be detailed in a 424B filed upon the secondary offering.

Look for Shares Eligible

To find share information in the document, go to the "Shares Eligible for Future Sale" section. Sometimes lockup information is included as a risk factor, but the "Shares Eligible" section will be more complete.

Some companies also will itemize the number of shares that will become available for trading on a given date in a table. But more often, the shares aren't broken out simply.

So in the "Shares Eligible" section, look for the language that talks about a selling restriction. For example, in the prospectus for Juniper Networks (JNPR) it says, "Of the outstanding shares of common stock following this offering, 40,757,014 shares will be subject to 'lockup' agreements described below on the effective date of this offering." It then explains how many and when shares will become available.

Note that the lockup expiration falls 180 days (or whatever the time period is) after the date on the cover of the final form 424B, which isn't necessarily the same day as the IPO, nor the same date as the document is filed at the SEC.

The Float

It helps to put the numbers in perspective by figuring out the current float, or the number of shares available to trade, and the days required for the market to absorb the additional shares.

To find the current float, look at the 10-Q, or quarterly report filed after the IPO or secondary offering. Do a search for "initial public offering" in the document, and it should say something to the effect of "We had an IPO, and sold this many shares." It will also indicate if the underwriters exercised the overallotment option (in the case of excess demand, an underwriter is allowed to sell more shares than originally indicated in the company's initial filing) and will give you a more precise number for the float than if you just use the share number on the cover of the prospectus.

To figure out the days required to absorb the additional float, divide the number of shares by the average daily volume (Yahoo! Finance is a good place to go for this). This number is significant because if it takes several days for the market to absorb the shares, the new supply could overwhelm demand and drive down the price.

Again, lockups aren't an exact science. Often it takes several readings of the prospectus to figure out exactly how many shares are available for trading and when. And keep in mind that, in many cases, the insiders won't actually sell the shares then. So the lockup phenomenon often stems more from the perception that selling is about to occur.

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