From the A-Z Guide: Lock-up (gate/suspension)

Lock-up: A provision that prohibits the investors of an investment fund to redeem their investments for a given period of time.

Lock-ups, gates and suspensions are restrictions on the withdrawal of funds by investors. As such each limit the liquidity of the interests in the funds. They are primarily designed and put into place to prevent a crippling run on the investments, which could force the manager of the fund to sell the assets in order to pay the redemptions, and hinder its operations. FASB’s ASU 2009-12 permits a fund interest to be valued at NAV, if NAV is calculated based on the fair value of underlying investments. A lock-up, gate or suspension does not impact the fair value from an accounting standard point of view, but impacts whether or not the interest is classified as Level 2 or Level 3.

Determining the appropriate level within the fair value hierarchy is a matter of judgment. If the reporting entity has the ability to redeem at NAV (for example, they have the contractual and practical ability to redeem) at the measurement date, then consistent with FASB ASC 820-10-35-58 a, the investment would be classified as Level 2.

When the reporting entity cannot redeem at NAV at the measurement date, but expects to be able to redeem (even if they choose not to redeem) in a short period of time, the investment would still generally be classified as Level 2. A short period of time is a matter of judgment and is often considered to be 90 days or less.

When the reporting entity does not redeem at NAV (distributions are made when underlying investments are sold) or the length of time during which a reporting entity cannot redeem at NAV (for example, because of the imposition of a gate) is not short, then the investment would be classified as Level 3.

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