IPO University

Once a company has completed its offering, its shares are tradable on public stock exchanges. While many large institutional investors can get an IPO allocation from the very beginning, most investors can’t buy shares of the IPO until after it starts trading.

Luckily there are other milestone-trading events for investors. The completion of the quiet-period is one of them.

After an IPO starts trading, investment banks begin a quiet-period, during which they can’t publish any research on the company. The end of the quiet period is important because the underwriters all launch their coverage on the IPO on that day and it can have a large impact on the stock.

Most investment banks observe a 25-day rule for a quiet period. On the coverage day analysts will issue their full reports on the company including earnings, estimates and price targets. These reports are usually positive; underwriters vetted these companies before going public, so it makes sense that the underwriter would remain optimistic about the company in their research coverage.

Another trading date to note is the expiration of the lock-up period. When a company goes public, the underwriters make company insiders sign a lock-up agreement. These lock-ups are legally binding contracts, prohibiting insiders from selling any shares of stock for a specified period of time, usually lasting 90 to 180 days.

When lock-ups expire, all the insiders are permitted to sell their stock. This can result in a rush of people trying to sell their stock to realize their profit. You can expect the stock price to go down if everyone tries to sell at once. This is a good opportunity to pick up these shares at a lower price.

While a company can only go public once, it can still issue more stock at a later date through a secondary offering. Unless the demand for a company’s shares are very high, a secondary offering may cause the price of shares to drop sharply as new supply is added to the market.

Bottom line.

If you can’t get an IPO allocation (like most of us) there is good money to be made in the aftermarket. Street research about the IPO done by the investment banks is usually positive, this means there is a good opportunity to get in on an IPO right before street research is released. Shares will also be up for grabs once the lock-up period expires; this is a good time to get IPO shares at a lower price.

Top U.S. IPOs by Aftermarket Performance YTD

Rank Company Ticker Aftermarket Return Trade Date
1 Tilray TLRY 347.7 % 07/19/18
2 Gritstone Oncology GRTS 106.9 % 09/28/18
3 Twist Bioscience TWST 103.9 % 10/31/18
4 Allakos ALLK 100.4 % 07/19/18
5 Liquidia Technologies LQDA 88.8 % 07/26/18
6 Goosehead Insurance GSHD 68.2 % 04/27/18
7 ARMO BioSciences ARMO 68.1 % 01/26/18
8 Kezar Life Sciences KZR 56.9 % 06/21/18
9 Americold Realty COLD 56.8 % 01/19/18
10 Scholar Rock SRRK 55.4 % 05/24/18