The 'Lockup' Effect: Facebook

Three months after its initial public offering, Facebook already is down almost 50% from its $38 offering price. The worst might be yet to come.

Over the next nine months, company insiders and early investors will be allowed to sell millions of their shares for the first time, which could put the social network's price under increased downward pressure. The company's first lockup expired on Thursday, sending shares down more than 6.2% to a record low of $19.87. The stock closed Friday at $19.05.

When companies go public, as Facebook did in May, company insiders and early investors can typically sell only a fraction of their shares, which are then traded freely on the stock market. The rest of their holdings are restricted from sale during a "lockup" period, which usually expires six months after the IPO.

After the lockup ends, the number of shares in the market can multiply several times over, often causing prices to fall.

Source:  Wall Street Journal

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