An IPO price is not a market price. It is a number negotiated between a company, its underwriters, and a small pool of institutional buyers before public trading ever starts — and the gap between that negotiated price and the first trade is where most of the confusion about "IPO pop" and "lock-up crash" headlines comes from, according to the SEC's investor-education site, Investor.gov.
What actually happens before a stock starts trading?
A company that wants to sell shares to the public first files a registration statement with the SEC — typically Form S-1 — which contains the prospectus, the disclosure document laying out the company's business, financials, and risk factors, Investor.gov says. The SEC staff reviews the filing for completeness of disclosure. That review is not an endorsement: "the SEC's declaration of effectiveness does not represent an approval of the merits of the IPO," the bulletin states.
Only after the registration statement is declared effective can shares actually be sold and trading begin.
Who sets the IPO price, and how?
The company and its underwriters — the investment banks running the deal — set the offering price together, and Investor.gov describes it as a mix of "market conditions, analysis and negotiation," not a formula. Underwriters gather "indications of interest" from prospective institutional buyers during a roadshow and use that demand data to recommend where to price the deal.
The interests in the room are not aligned. A company generally wants a higher price, because it raises more capital for the same number of shares sold. Underwriters often favor a price attractive enough to generate strong first-day demand for the clients they're allocating shares to — and because underwriter compensation is typically a percentage of the amount raised, Investor.gov notes the arrangement carries a built-in conflict of interest.
The bulletin is direct about what that pricing exercise does and doesn't tell investors: "the offering price may bear little relationship to the trading price of the securities" once the stock opens.
Why don't individual investors get IPO shares at the offering price?
Because the allocation happens before the stock trades publicly, and underwriters decide who's on the list. Investor.gov states that the bulk of shares in a typical offering go to "institutional and high net-worth clients, such as mutual funds, hedge funds, pension funds, insurance companies." Retail investors without an existing relationship to an underwriting bank overwhelmingly end up buying — if they buy at all — once the stock is already trading on the open market, at whatever price the first session sets.
That timing gap matters. The people setting the initial price are, in most cases, not the same people buying at the opening bell.
What is a lock-up period, and why does it exist?
A lock-up agreement is a contractual restriction — arranged by the underwriters — that bars a company's existing shareholders, including founders, employees, and pre-IPO investors, from selling their shares for a set stretch after the offering, commonly around 180 days, per Investor.gov.
The mechanism exists to manage supply. If every early shareholder could sell on day one, the stock would face a wave of selling pressure right when trading volume and public information about the company are both thin. Restricting early holders from cashing out is meant to let a market for the stock establish itself first.
What happens when the lock-up expires?
The restriction lifts, and shareholders who were barred from selling become free to do so. Investor.gov frames the moment plainly: "the lock-up expirations give these early investors the opportunity to sell their shares to the extent they weren't able to do so as selling shareholders." That's it — the bulletin does not claim the stock necessarily falls, only that a new pool of sellers becomes eligible to enter the market at that point. What any individual stock does around that date depends on company-specific news, broader market conditions, and how many locked-up holders actually choose to sell, none of which the mechanism itself predicts.
Why do freshly public stocks swing so much in the early weeks?
Trading volume right after an IPO is often thin relative to the company's total share count, since most shares are still held by locked-up insiders and institutional allocees rather than freely traded in the market. Investor.gov warns that this "limited trading volume ... can operate to drive the trading price of an issue steeply up" — and that underwriters sometimes provide temporary price support in the earliest sessions that can end abruptly, contributing to sharp moves once it does.
The bulletin's own framing of the category is blunt: "IPOs can be risky and speculative investments." Every company's prospectus includes a risk-factor section — management's own list of threats to the business — that Investor.gov treats as required reading before the mechanics of pricing or allocation matter at all.
The mechanism, not the pick
None of this tells you whether any specific offering is priced right, whether a particular lock-up expiration will move a particular stock, or whether an IPO is a good buy — those are calls this desk does not make. What the public record does establish is the sequence: registration and disclosure, underwriter-negotiated pricing built on institutional demand rather than public trading, an allocation process that routes most shares to institutional and high-net-worth buyers first, and a lock-up period that defers — but does not eliminate — the supply of shares held by insiders. The gap between the negotiated offering price and whatever the market does afterward is the space where all of the "pop" and "crash" headlines live.
Frequently Asked Questions
Does the SEC set or approve the IPO price?
No. The SEC reviews a company's registration statement for disclosure completeness, not for whether the price or the investment is sound — Investor.gov states explicitly that effectiveness is not an approval of the offering's merits.
How long is a typical IPO lock-up period?
Investor.gov describes roughly 180 days as the common length, though the exact term is set by contract between the company and its underwriters and can vary by deal.
Can retail investors buy shares at the IPO price?
Rarely, without an existing brokerage relationship tied to the underwriting banks. Most retail buying happens after the stock is already trading publicly, per Investor.gov.
Does a stock always drop when its lock-up expires?
Not necessarily. The lock-up expiration makes previously restricted shareholders eligible to sell; whether they do, and what that does to the price, depends on company-specific and market conditions the mechanism itself does not dictate.
Where can investors find the risk factors for a specific IPO?
In the company's prospectus, filed as part of its registration statement with the SEC — Investor.gov identifies the risk-factor section as required reading before investing.
For a related reviews perspective, read How SAFE Notes Actually Work: Caps, Discounts, and the SEC Rules Founders Skip Past.
For more context, read FLMIC declares a dividend for the third consecutive year.
