Robinhood, Others Upend Rules for Early IPO Trading

Robinhood Markets Inc. revolutionized online trading. Now, as it prepares to list its own shares, the upstart broker is taking aim at a pillar of the traditional IPO process: lockups.

When Robinhood shares start trading at the end of this month, employees will be able to sell 15% of their holdings immediately, rather than after the traditional six-month lockup period, according to a regulatory filing. Three months later, they can sell another 15%.

In the past 12 months, several companies have experimented with looser lockups. In September, data-warehousing company Snowflake Inc. said employees could sell as much as 25% of their vested stock after roughly three months. Then Airbnb Inc. said it would allow employees to sell up to 15% of their shares in the first seven trading days.

Lockups are agreements with underwriters that prevent a company’s employees and other early shareholders from selling their stock immediately after an IPO. Traditionally, companies and their bankers have been wary of allowing early selling by insiders because it could send a negative signal, flood the market with shares and put pressure on the stock in the first days of trading.

In recent years, however, there has been a re-evaluation of that view. In a red-hot IPO market, some companies have experienced unsustainable first-day pops in their shares. It has at times taken hours to open popular IPOs on their first day of trading because too few investors were willing to sell. Adding to the initial supply is now seen as a potential antidote.

So-called tiered lockups like Robinhood’s are also aimed at avoiding the steep share-price drop that can be triggered when a big chunk of stock is released on a single day. In November 2019, Uber Technologies Inc. lost $2 billion in market capitalization in 24 hours when shares subject to a traditional lockup were released.

‘In the last couple years, companies finally had so much leverage that they could negotiate this.’

— Pamela Marcogliese of Freshfields Bruckhaus Deringer

Robinhood is seen as particularly subject to volatility, according to traders and bankers. The stock-trading app soared in popularity during the pandemic as amateur investors bought up shares of so-called meme stocks on its platform, helping send GameStop Corp., AMC Entertainment Holdings Inc. and others rocketing skyward.

The easing of lockups is also driven by companies’ desire to keep employees happy in a hot job market, according to bankers and lawyers who work on IPOs. That is particularly important at technology startups, which often compensate employees to a large degree with stock options.

As bigger and buzzier startups such as Robinhood and DoorDash Inc. DASH 0.69% go public, the companies have won more latitude from underwriters to ease lockups, said Pamela Marcogliese, a partner at law firm Freshfields Bruckhaus Deringer LLP who focuses on U.S. capital markets.

“In the last couple years, companies finally had so much leverage that they could negotiate this,” she said.

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DoorDash opted for looser-than-normal lockup restrictions when it made its debut in December. Prabir Adarkar, the company’s finance chief, said the goal was to reward current and former employees, many of whom had worked at the food-delivery company for years.

The increasing popularity of the direct listing, in which employees and early investors can sell stock on the first day of trading, was also a factor, he said in an interview.

“The typical IPO has competition these days,” said Mr. Adarkar. “If you took a company public three or five years ago, there wasn’t a lot of variation. Now, companies have choices.”

The GameStop frenzy put the spotlight on a growing group of investors who seek and share trading information on social media platforms like YouTube and TikTok. Three investors explain how these online communities are helping them chase the market. Photo illustration: Adam Falk/The Wall Street Journal

Write to Corrie Driebusch at corrie.driebusch@wsj.com

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