Leak-out agreement

How it works

A leak-out agreement lets a holder sell, but slowly. Typical terms cap daily sales at a percentage of the stock's daily trading volume (for example 10% or 15%), or at a fixed number of shares per day or month, for a stated period. Some are tiered: tighter at first and loosening over time, or with exceptions for sales above a set price.

Leak-outs appear in several situations:

• investors in a PIPE or registered direct offering, as part of the purchase agreement;
• sellers of a business who receive stock as acquisition consideration;
• holders whose debt is exchanged for shares;
• as a softer alternative to, or a step after, a lockup.

Worked example

Hypothetical: Company X issues 4,000,000 shares to the sellers of a business it acquires. The leak-out allows sales of up to 10% of daily volume for six months. If Company X trades 1,500,000 shares a day, the sellers can sell up to 150,000 shares a day in aggregate. At that pace, selling the whole block would take about 27 trading days if volume held steady.

Why it matters

A leak-out changes the timing of supply, not its size. The full block still exists and is still part of shares outstanding; the agreement only meters how fast it can be sold. When a leak-out ends, the restriction disappears, just as with a lockup expiration.

Leak-outs are contractual, so they are separate from regulatory limits such as the Rule 144 volume cap on affiliates.

How to spot it

Search the purchase agreement or acquisition agreement exhibits (often filed with an 8-K under Item 1.01) for "leak-out" or "Leak-Out Agreement". The prospectus for a resale registration may also describe it in the plan of distribution. See Lockup expirations.