Your lockup is on the verge of ending. You’ve been watching the date on your calendar for six months — longer, really, if you count the years leading up to the initial public offering (IPO). The market opens, you log into your brokerage account, locate the shares, and attempt to sell.
The trade doesn’t go through.
Your company’s trading policy requires pre-clearance, and you’re three weeks from its next earnings release. Your broker also needs to determine whether the shares are restricted and whether Rule 144 applies to the sale. If you’re considered an affiliate of the company, additional volume and filing restrictions may apply.
No one mentioned any of this while popping champagne during the IPO celebration.
It’s quite common for pre-IPO employees to learn that their shares aren’t freely tradeable — after all, the end of a “lockup” certainly sounds liberating, right? Except it’s practically a misnomer; the lockup expiration is really just a transition to a different set of rules.
Which Restrictions Apply to You?
Not every employee at a newly public company faces the same constraints. Before planning a sale, it helps to distinguish between three overlapping sets of rules.
- Lockup restrictions are contractual. They typically prohibit certain pre-IPO shareholders from selling for a specified period after the offering.
- Rule 144 restrictions are federal securities law resale rules. They can apply because the shares are “restricted securities,” because the seller is an “affiliate” of the company, or both.
- Insider-trading and company-policy restrictions apply when an employee possesses material non-public information (MNPI) or is otherwise subject to the company’s trading policy, blackout periods, or pre-clearance procedures.
For Rule 144 purposes, an affiliate is someone who directly or indirectly controls, is controlled by, or is under common control with the issuer. Executive officers, directors, and controlling shareholders are common examples, but affiliate status is based on control instead of a simple job title or ownership-percentage test.
That means an employee can be subject to a blackout period without being a Rule 144 affiliate. Likewise, a non-affiliate may still hold restricted securities that are subject to Rule 144’s holding-period requirements.
If you’re uncertain which category you fall into, confirm your status with your company’s legal or compliance department before the lockup expires.
The Lockup Period Explained
The lockup period (typically 90 to 180 days post-IPO) is a contractual restriction negotiated between the company and its underwriters. Its purpose is to prevent a flood of insider selling immediately after the IPO that could drive the stock price downward. The terms are likely disclosed in the IPO prospectus and apply to the shareholders covered by the lockup agreement.
It isn’t, however, a countdown to free trading. For company insiders, the lockup expiration simply removes one layer of restriction while leaving several others intact. Even if you aren’t a Rule 144 affiliate, shares acquired in certain private or unregistered transactions may still be restricted securities subject to Rule 144’s holding-period and other applicable conditions.
Some employees may have sold pre-IPO shares through secondary market transactions or company-sponsored tender offers before the IPO. Those transactions make accurate lot-level recordkeeping especially important, since different blocks of shares may have different acquisition dates, cost bases, and holding periods.
Rule 144: When It Applies and What It Restricts
Rule 144 provides a safe harbor for the public resale of certain restricted and control securities without registering the resale as a securities offering.
The requirements depend on two questions:
- Are your shares restricted securities?
- Are you an affiliate of the company?
As you can probably imagine, affiliates face more ongoing restrictions than non-affiliates.
Holding Period
Rule 144’s holding-period requirement applies to restricted securities, not simply to every share owned by an affiliate.
For restricted securities of a company that has been subject to Exchange Act reporting requirements for at least 90 days, the Rule 144 holding period is six months. Restricted securities of a non-reporting issuer require a one-year holding period.
A non-affiliate who has held restricted securities of a reporting company for more than six months but less than one year can usually resell under Rule 144 if the issuer satisfies the current public information requirement. After one year, a non-affiliate generally can resell without complying with the other Rule 144 conditions.
Affiliates face additional requirements even after any applicable holding period has been satisfied.
Volume Limits for Affiliates
If you are an affiliate, Rule 144 limits the amount of equity securities you can sell during any three-month period. For exchange-listed securities, the limit is normally the greater of:
- 1% of the outstanding shares of the same class, or
- the average reported weekly trading volume during the four calendar weeks preceding the applicable Form 144 filing or sale.
For a company with 100 million shares outstanding, the 1% test alone would permit up to one million shares during the applicable three-month period, although the trading-volume calculation may permit more.
Manner of Sale
Affiliates selling equity securities under Rule 144 are also subject to manner-of-sale requirements. Sales must be executed as ordinary brokerage transactions or directly with market makers, and neither the seller nor broker may solicit orders to buy the shares.
Form 144
An affiliate relying on Rule 144 must file Form 144 if proposed sales during a three-month period exceed 5,000 shares or $50,000 in aggregate value. Non-affiliates are not subject to the Form 144 filing requirement.
Missing or late filings are a common compliance error that can complicate future transactions. Keep in mind, Form 144 is a notice of a proposed sale, not SEC approval of the transaction.
Blackout Periods: When You Can’t Trade Even When You’re Allowed To
Rule 144 governs if and under what conditions certain securities can be resold. Your company’s insider-trading policy governs a different question: are you permitted to trade at that particular time?
Blackout periods are company-imposed restrictions designed to reduce the risk of trading while employees possess material non-public information. They can apply to a broader group of employees than those considered affiliates under Rule 144. A company might, for example, close its trading window several weeks before quarter-end and reopen it shortly after earnings are publicly released. The exact timing varies by company.
Even during an open trading window, employees subject to the company’s pre-clearance policy may not be able to simply execute a trade. Many companies require pre-clearance from their legal or compliance department before any insider transaction is executed. The insider must confirm they hold no MNPI, submit the clearance request, receive written approval, and execute the trade within a specified window — often as short as two or three days. If the trade doesn’t execute within that window, the process starts over.
Between the lockup period, quarterly blackouts, and pre-clearance requirements, the windows during which you can execute material sales (assuming you’re subject to restrictions) are really quite narrow. A 180-day lockup followed by a quarterly blackout could push the first realistic selling opportunity until six or seven months after the IPO date.
10b5-1 Trading Plans: Selling on a Schedule Instead of a Window
Tight trading windows aren’t ideal for systematically selling down a concentrated position. A 10b5-1 plan offers a more structured approach.
A 10b5-1 plan is a pre-arranged selling program established under SEC Rule 10b5-1, which specifies in advance the:
- Number of shares to be sold
- Price at which they’ll be sold (or a formula for determining price)
- Dates on which sales will occur
After adoption, you generally can’t exercise discretion over the amount, price, or timing of individual trades under the plan. The plan instead follows the predetermined terms or formula established when it was adopted.
The benefit is legal protection. Because the plan is established at a time when you don’t have MNPI, and because you commit to a predetermined schedule, the trades executed under the plan are generally protected from insider trading claims, even if you subsequently come into possession of MNPI.
Following SEC rule amendments that took effect in 2023, there are stricter requirements for establishing and using 10b5-1 plans:
- For officers and directors, there’s a cooling-off period — typically the later of 90 days after plan adoption or two business days after disclosure of the issuer’s financial results for the quarter in which the plan was adopted, subject to a maximum of 120 days.
- For persons other than officers and directors, the cooling-off period is 30 days.
- Overlapping 10b5-1 plans are restricted, subject to limited exceptions.
- A person is generally limited to one single-trade plan in any 12-month period, subject to limited exceptions.
- The plan must be entered into in good faith and not as part of a scheme to evade insider-trading prohibitions.
If you have a large concentrated position, which describes many pre-IPO employees at the moment of lockup expiration, a 10b5-1 plan enables you to systematically sell down the position over time. This approach reduces timing risk, creates a defensible record of non-MNPI-based selling, and removes the need to navigate trading windows for every transaction.
The Broker Compliance Process
Even if your company has cleared you to trade, your brokerage may have its own compliance requirements before executing the sale.
This is particularly relevant when selling restricted or control securities. Depending on your circumstances, the broker may need to confirm if Rule 144 applies and if the proposed transaction satisfies its requirements before releasing the shares for sale.
For an affiliate sale under Rule 144, the review may include:
- Confirming your affiliate status and whether the securities are restricted
- Verifying that any applicable holding period has been satisfied
- Checking the proposed sale against Rule 144’s three-month volume limitation
- Confirming compliance with applicable manner-of-sale requirements
- Coordinating any required Form 144 filing and supporting documentation
Your company may separately mandate pre-clearance under its insider-trading policy, so these processes can overlap without being the same thing. Company approval to trade doesn’t necessarily mean your broker is ready to execute the transaction immediately.
The exact process and turnaround time vary by brokerage and by the type of shares you’re selling. That makes it worth contacting your broker before your anticipated selling window opens — especially if you’re planning a sizable sale. Resolving paperwork or Rule 144 questions in advance can prevent administrative delays from consuming an already-narrow trading window.
Tax Implications of Post-IPO Sales
We can’t talk about stock sales without at least briefly mentioning the tax implications, which vary considerably depending on your equity compensation and how long you’ve held the shares.
Restricted Stock Units (RSUs)
RSUs are taxed as ordinary income at vest, at the fair market value (FMV) on the vest date. That becomes your cost basis. Shares held more than one year after vest qualify for long-term capital gains treatment on subsequent appreciation. Selling immediately after vest — as many employees do to cover the tax withholding — usually generates no additional income tax on the vested shares but gives up the opportunity for long-term capital gains rates on future appreciation.
Stock Options (NSOs and ISOs)
For nonqualified stock options (NSOs), the spread between the strike price and FMV at exercise is taxed as ordinary income. Shares held more than one year after exercise qualify for long-term capital gains on subsequent appreciation.
For incentive stock options (ISOs), there’s no ordinary income tax at exercise, but the spread is a preference item for alternative minimum tax (AMT) purposes, which is a parallel tax system that many people don’t know about. You calculate your tax liability under both systems and pay whichever is higher. So, exercising large ISO grants can produce a significant AMT bill even before any shares are sold.
Post-exercise, holding period determines tax treatment:
- Qualifying disposition: If you hold the shares at least two years from the original grant date and at least one year from the exercise date before selling, the entire gain is taxed at long-term capital gains rates.
- Disqualifying disposition: Selling before satisfying both holding periods (even by one day) triggers a disqualifying disposition. The spread at exercise is reclassified as ordinary income, and only the post-exercise appreciation (if any) qualifies for capital gains treatment.
Qualified Small Business Stock (QSBS)
If you exercised ISOs early or otherwise acquired shares before your company went public, some of those shares may qualify as Qualified Small Business Stock (QSBS) under Section 1202.
For shares issued after July 4, 2025, the company must have had gross assets of $75 million or less immediately before and after the stock was issued. For shares issued on or before July 4, 2025, the prior $50 million threshold applies.
The available exclusion also depends on how long the shares are held. For qualifying shares issued after July 4, 2025, you could receive a:
- 50% exclusion after three years
- 75% exclusion after four years
- 100% exclusion after five years
The exclusion is typically subject to a per-issuer cap equal to the greater of $15 million or 10 times your adjusted basis in qualifying shares.
For qualifying shares issued before July 5, 2025, the full exclusion usually requires a five-year holding period, with the prior fixed-dollar cap of $10 million or 10 times adjusted basis.
QSBS eligibility is highly fact-specific. The company must meet several requirements beyond the gross-asset test, and the timing of exercise, issuance, and sale can materially affect the outcome. If you think your shares may qualify, it’s worth confirming eligibility with a tax professional before selling.
State Taxes and Net Investment Income Tax (NIIT)
California taxes capital gains as ordinary income at rates up to 13.3% — no preferential long-term rate. For long-term capital gains, the combined federal and California tax burden at the top bracket can approach 37%: federal long-term capital gains tax at 20%, plus the 3.8% Net Investment Income Tax (NIIT) for higher earners, plus California state income tax at 13.3%. For short-term gains taxed as ordinary income, the combined rate is even higher. That’s why it’s critical to coordinate post-IPO selling decisions with a financial advisor and tax professional before executing sales.
Selling Strategically: Questions to Ask
Understanding the constraints is one thing. Building a selling strategy within them is another.
A few questions worth working through before the lockup expires:
- Are you subject to your company’s blackout or pre-clearance rules?
- Are the shares you’re selling restricted securities?
- Are you considered an affiliate for Rule 144 purposes?
- If Rule 144 applies, have you satisfied the applicable holding period?
- If you’re an affiliate, does your proposed sale comply with the applicable volume, manner-of-sale, and Form 144 requirements?
- Would a 10b5-1 plan serve your goals better than window-by-window selling?
Chances are company stock represents a disproportionate share of your net worth. A concentrated, illiquid position that just became liquid is exactly the kind of situation that benefits from a deliberate and thorough plan.
The Window Is Open — Now What?
The lockup expiration might not be the moment you’ve been waiting for, which is news I don’t enjoy breaking. It’s the beginning of yet another regulated process.
The key is understanding which rules apply to you before you try to sell.
That may include contractual lockup terms, company blackout and pre-clearance requirements, Rule 144 restrictions on restricted securities, and, if you’re an affiliate, additional volume, manner-of-sale, and Form 144 requirements.
At BEW, we work with pre-IPO and recently public employees to navigate the trading mechanics, tax implications, and diversification strategy that follow a liquidity event. If you’re approaching lockup expiration and want to understand your options before the window opens, I’d be happy to help.
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