Definition
A lock-up is a rule that ties up the shares held by major shareholders and institutional investors for a set period when a company newly lists on the stock market. In Korea, major shareholders' shares are locked by mandate under listing rules (mandatory holding), while institutional investors make a voluntary pledge when they receive IPO shares (mandatory holding pledge). It exists to stop a flood of shares hitting the market right after listing and crashing the price, and to protect ordinary investors.
Why lock up major shareholders' shares?
Imagine a popular new restaurant where the owner sells off all of their stake on opening day and walks away. Customers would get nervous. The stock market works the same way. If the founder or a big investor dumps a huge number of shares right after listing, the market floods with supply and the price plunges.
A lock-up is the rule made to prevent that. By promising not to sell for a set period, insiders act as a fence that protects ordinary investors who just bought in from a sharp price drop.
It also stops what's often called "eat and run," where founders and key executives pocket a huge gain right after listing and leave the company. It's a solid safeguard that pushes management to run the company responsibly, so the business keeps growing with a long-term vision after it goes public.
Without a lock-up, speculative selling by early investors could make even a healthy company lose the market's trust and wobble from the start. That's why a lock-up is the bare minimum promise for both companies and investors.
What happens the day a lock-up ends
A lock-up doesn't tie up shares forever. After a set period, usually 15 days, 1 month, 3 months, or 6 months, the lock comes off. This is called a "lock-up expiration."
Once the lock ends, a huge number of shares that couldn't be traded can hit the market all at once. When there are suddenly more shares for sale than people who want to buy, the risk that the price drops sharply in the short term goes up. On Wall Street, this pile of potential extra supply is called an "overhang."
That's why, in the IPO market (newly listed shares), the lock-up ratio and the expiration schedule are treated as key information. The more unpledged shares that could reach the market, the more the price can swing around the expiration date.
On the other hand, if the company's earnings are strong and its growth outlook is bright, investors may keep holding even after the lock-up ends. So an expiration date does not automatically mean a drop. You have to look at it alongside the mood of the market.
A little more precisely: a legal duty and a voluntary pledge
Lock-ups come in two main forms. One is "mandatory custody (mandatory holding)," which is enforced by exchange rules. The other is the "mandatory holding pledge," which investors make on their own. The terms differ a little, but the core is the same: shares are tied up and can't be sold for a set period.
Shares held by people who know the company's inside story like the back of their hand, such as the largest shareholder and key executives, are locked by mandate under the Korea Exchange's listing rules. These insiders are usually barred from selling for at least 6 months after listing.
By contrast, large institutional investors who subscribe to an IPO can set their own lock-up period. The longer the holding period an institution pledges, the more IPO shares it gets allocated as a reward.
In the end, a lock-up is more than a rule that forcibly locks up shares. It's also widely used as an important signal of trust, showing how firmly institutional investors believe in a company's long-term growth.
Common misconceptions
When the lock-up period ends, the stock price always crashes.
Shareholders don't automatically dump their shares when a lock-up ends. If the company's earnings and growth outlook are positive, institutions and major shareholders may keep holding, and the price can stay stable.
Where you meet it
When a popular large company lists, the largest shareholder's shares are locked for 6 months under the listing rules.
An institutional investor applies for a 3-month lock-up (mandatory holding pledge) to get even a single extra IPO share allocated.
In one sentence
A lock-up is a safeguard that ties up major shareholders' and institutions' selling for a set time, to prevent a price crash right after listing.