Market standoff: Overview, definition, and example
What is a market standoff?
A market standoff refers to an agreement or period during which certain stakeholders—such as company insiders, executives, or major shareholders—agree not to sell or trade their securities, such as stocks or shares, for a specified period of time after a public offering or IPO (Initial Public Offering). The purpose of a market standoff is to prevent excessive volatility in the market immediately after a company’s shares are made publicly available. By restricting insiders from selling their shares, a standoff ensures that the market is not flooded with too many shares, which could negatively affect the stock price.
Market standoffs are often a requirement of IPO agreements and are designed to help stabilize the price of newly listed stocks. The length of the standoff can vary but typically lasts from 90 to 180 days.
Why is a market standoff important?
A market standoff is important because it helps maintain the stability and integrity of a company’s stock price in the initial stages after its public offering. If insiders were allowed to sell their shares immediately after an IPO, it could create an oversupply of shares, which might drive down the stock price. The standoff helps build investor confidence by ensuring that insiders are not profiting too quickly from the public offering, which could signal that they do not believe in the long-term success of the company.
For businesses, market standoff agreements help protect the value of their stock and provide a sense of stability to potential investors. For investors, a market standoff reassures them that the stock price is less likely to be manipulated or dramatically affected by insiders selling off large amounts of stock.
Understanding market standoff through an example
Imagine a company that has just gone public with its IPO. The company's founders and key executives own a large percentage of the shares. To prevent these insiders from selling their shares immediately after the offering, the underwriters of the IPO require them to sign a market standoff agreement, agreeing not to sell their shares for six months. This restriction ensures that the stock price remains relatively stable as the company establishes itself in the public market, and helps build investor confidence in the company’s long-term growth.
In another example, a tech startup that goes public as part of an IPO has several venture capitalists who own significant shares in the company. The IPO underwriters require the venture capitalists to agree to a market standoff, during which they cannot sell their shares for 180 days after the offering. This protects the company’s stock from a sudden drop in price, as the venture capitalists would otherwise have the ability to sell off their holdings quickly.
An example of a market standoff clause
Here’s how a market standoff clause might appear in an IPO agreement:
"The Company, its officers, directors, and shareholders holding 5% or more of the Company’s common stock agree that they will not, directly or indirectly, sell, transfer, or otherwise dispose of any shares of the Company’s stock for a period of [180] days following the effective date of the IPO, without the prior written consent of the lead underwriters."
Conclusion
A market standoff is an important component of an IPO that helps ensure market stability by preventing insiders from selling large quantities of shares immediately after the offering. By restricting stock sales for a set period of time, it helps prevent volatility and builds investor confidence in the company’s long-term success. For businesses, implementing a market standoff protects the value of their stock and promotes a healthier, more stable market environment.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.