What is a Market Standoff Agreement?
How Does a Market Standoff Agreement Work?
When a company issues new shares of stock, it contracts a brokerage house to serve as an underwriter. The underwriter agrees to market and sell the new shares in return for a fee. In a market standoff agreement, the issuing company agrees to prohibit its insider holders (for example, the CEO and executive board members) from selling their shares for a specified period of time from the date of the IPO. This period lasts anywhere from 90 days to one year, after which time the company insiders are free to sell their holdings.
For example, suppose Company ABC executes an IPO on January 1, 2011. Company ABC has a 180-day market standoff agreement with its underwriter. This means that insiders must wait to sell their stock until the June 30, 2011 deadline has passed.
Why Does a Market Standoff Agreement Matter?
A brokerage house assumes a high level of risk when underwriting an IPO. Movements in the price of new shares can have a significant effect on sales. A price decline in the time shortly following an IPO can deter investors from purchasing the new shares and result in consequent losses for the underwriter. A market standoff agreement reduces this risk by preventing a substantial price decline resulting from an abrupt sale of shares by insiders.