Freed-Up Defined

Going for an IPO (Initial Public Offer) is a big decision for any private company. It not only allows them to generate funds but also opens the door to multiple opportunities to expand the company. Underwriters play a significant role in the IPO process They work hand in hand with the IPO issuing body, aid in fixing the price of the IPO, and sell those shares to the interested ones.

Freed Up is the post-lock-up IPO period, which lasts anywhere between 90 to 180 days. During this time frame, the underwriters cease to take up selling of shares at the decided price. While this lock-up period is still active, even the insiders of the company cannot make any move to sell their securities in the market.

The company insiders who possess shares can start selling again as and when the lock-up period comes to an end. The period after the lock-up phase is called the freed-up, and the money that’s left behind post the closing of the position is called the freed-up money. The investment bank underwriters are given the leeway and the authority to sell the rest, not at the predetermined price but at the existing market price.

This article explains the freed-up concept in detail along with the Initial Public Offering (IPO) steps before the freed-up strategy.

Freed Up Meaning and Definition

The freed-up concept is a healthy financial strategy that helps companies effectively sell stocks. The main purpose of lock-up before the freed-up is to shun the stock market from flooding the excess supply of the stock of a particular company. This concept is an indication for the IPO (Initial Public Offering) or a DPO (Direct Public Offering). While the IPO involves intermediaries like investment banks/underwriters, the DPO doesn’t.

If any private company decides to go public, they issue shares to raise funds from the public. Before that, the company hires an investment bank that oversees and manages all the IPO-related activities.

As and when the investment bank enters the market for selling the company shares, there’s no looking backwards. The bank processes the allotment of shares to the investors at an agreed price. At times, the demand for the shares is more than the supply, as a result, the investors are ready to pay more than the prefixed price. But irrespective of the demand for the shares in the market, the price can only be modified or customized only after the syndicate is freed up from the price constraints.

The freed-up concept is not only applied to the syndicate or the underwriters but also the insiders of the company as well. Even though they have shares in hand, they are not allowed to sell them in the market until the lock-in period gets over. The company can use the freed-up capital to invest in multiple asset classes.

IPO Steps Before Being Freed Up

During the Initial Public Offering (IPO), the company/entity endures through a series of activities. Let’s understand the IPO steps before this event.

The roadshow is manifested to a set of experts like investors, banks, stakeholders, fund managers, analysts, and other interested parties. Considering the demand and supply for the shares, the underwriters or the underwriting firm will go for the book building. Here, the underwriters establish the price at which the securities or the shares have to be issued at the time of the public offering (IPO).

1. The Red Herring Prospectus

   Before an IPO, a separate team is set up that includes associated investment banks, law professionals, certified public accountants, SEC experts (Securities and Exchange Commission), and syndicate underwriters.

   They draft the company’s prospectus with the history of the company, debts and risks, capital invested, operations of the business, financial status/health of the company, management information, and the future path and goals of the company. This information gives a clear-cut idea of where the company stands in the market. And also solves the major doubt of whether the company should go for the IPO or not.

2. Company registration

   The next step in the IPO process is registration where the company furnishes all the relevant documents of the initial public offering to the Securities Exchange Commission (SEC). Once the registration is done, the syndicate underwriters, dealers, and related brokers are legitimately given the shares to sell in the market.

3. IPO promotion

   This is conducted and managed by the management team or underwriting entity before the IPO. These shows are ushered to create interest in the public and make them know about the offering. Additionally, events like these stir up interest in the minds of the public to buy the securities issued during an IPO.

4. The statutory prospectus

   After determining the price, they draft and distribute the final prospectus to the interested parties like the public investors, the Securities Exchange Commission. Also known as the statutory prospectus, the draft contains information related to the public offering. The preliminary prospectus is commonly issued to everyone but the final prospectus is made available to those who vote to buy the IPO issued securities of the company in the market.

5. Ban on promotional activities

   Now, the SEC or the Securities Exchange Commission imposes a ban on promotional activities or publicity foretelling about the future of the company and non-tested opinions. The quiet period is for 10 days, and it starts after the first day of the IPO.

6. Post-IPO period

   The quiet period and the lock-up period create price stability for the company’s shares in the market. Though the insiders or any holding members of the shares cannot sell in the market till the lock-up period comes to cease. Generally, the Securities Exchange Commission doesn’t keep any such restrictions but companies prefer to keep it that way to create demand in the market. In doing so, the price of the shares shoots up as well.

As and when the restricted phase completes and enters the freed-up phase, the shareholding members in the company can sell them in the market at the prevalent rates. In some cases, a few company insiders are not allowed to sell the shares even after the lock-up phase for many reasons.