Financial Reporting
The Lock-Up Discount Returns: FASB's 2026 Proposal on Restricted Shares and Fund Marks
FASB's 2026 proposal would have funds discount locked-up shares under ASC 820. What the narrow exception covers, how to size it, and why it isn't a 409A.
By 409.AI Team - 2026-08-17
# The Lock-Up Discount Returns: FASB's 2026 Proposal on Restricted Shares and Fund Marks
One of your portfolio companies went public in June. The stock closed the quarter at $24. Your fund can't sell a single share for another four months, because every pre-IPO holder signed a 180-day lock-up. Quarter-end arrives. What number goes in the books?
Since 2022, US GAAP has given a blunt answer: $24 a share, times your share count, with no adjustment for the fact that you're locked in. On July 1, 2026, FASB proposed to change that answer for one group of reporters, and it moved fast enough that the change could land on 2026 financial statements.
What ASU 2022-03 settled, and why funds pushed back
In June 2022, FASB issued ASU 2022-03, *Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions*. The amendments clarified that a contractual restriction on the sale of an equity security is not part of the unit of account of that security, so it isn't considered when measuring fair value, and they prohibited recognizing the restriction as a separate unit of account. Holders also picked up disclosure duties: the fair value of equity securities subject to such restrictions, the nature and remaining duration of the restrictions, and any circumstances that could cause them to lapse. The guidance took effect for fiscal years beginning after December 15, 2023 for public business entities and after December 15, 2024 for all other entities ([BDO's summary of the ASU](https://arch.bdo.com/Fair-Value-Measurement-Equity-Securities-with-Contractual-Sale-Restrictions)).
The reasoning was tidy. Two investors hold the same class of shares in the same company. One signed a lock-up, the other didn't. The share is identical, and the restriction attaches to the holder rather than to the asset, so fair value shouldn't move.
Tidy, but contested. Three of the seven board members dissented, arguing that the distinction between a restriction on the asset and a restriction on the holder isn't economically meaningful, and that a contractual sale restriction has real economic substance a buyer would price.
Once the guidance took hold, funds were marking positions they couldn't sell at prices they couldn't transact at. A crossover fund holding newly public shares reported the closing price on the last day of the quarter even though selling was contractually off the table. That gap shows up in net asset value, in reported performance, and in fees calculated on net assets.
What the July 2026 proposal would do
The proposed ASU is titled *Fair Value Measurement (Topic 820): Investment Companies with Equity Securities Subject to Contractual Sale Restrictions*. It would create a limited exception to Topic 820 for investment companies within the scope of Topic 946, requiring them to consider a contractual sale restriction when measuring the fair value of an equity security, and to disclose the amount of the resulting discount. Everyone else keeps applying ASU 2022-03 as written.
Two things stand out about the process. First, the comment window ran 15 days and closed on July 17, 2026, which is unusually short for a fair value amendment and reads as a signal that the board wants to redeliberate and finalize quickly. Second, the SEC published FASB's [proposed taxonomy update tied to the proposal](https://www.sec.gov/newsroom/whats-new/260708-fasb-issues-proposed-taxonomy-update) on July 8, a week into that window, which is the housekeeping that accompanies an amendment expected to be finalized rather than shelved.
The Investment Company Institute [filed a letter supporting the proposal](https://www.ici.org/comment-letter/ici-comment-letter-supporting-fasb-proposal-on-contractual-sale-restrictions) and encouraged the board to finalize promptly. The complaints FASB heard from stakeholders were specific: ignoring a contractual sale restriction can overstate NAV, distort performance reporting and management fees, and produce different economic outcomes for investors who subscribe, investors who redeem, and investors who stay. Coverage of the proposal framed the effect plainly, as a change that [could lower reported values for shares funds can't sell](https://tax.thomsonreuters.com/news/new-u-s-accounting-proposal-could-lower-values-for-shares-funds-cant-sell/). FASB's [technical agenda](https://www.fasb.org/projects/technical-agenda) is where the redeliberation status and any effective date will show up, and as of mid-August 2026 no final ASU has been issued.
The arithmetic on a locked-up position
Numbers make the stakes obvious. Suppose your fund holds 2,000,000 shares of a company that IPO'd at $18 and trades at $24 on the last day of the quarter, with 120 days left on a 180-day lock-up.
Under today's guidance, the mark is 2,000,000 × $24, or $48,000,000, full stop. Under the proposal, the fund would reflect the restriction. If the analysis supports an 8% discount for four months of enforced illiquidity, the position comes in at $44,160,000, and the fund discloses the $3,840,000 discount.
That $3.84M is not an accounting curiosity. On a fund charging 2% on net assets, it's roughly $77,000 a year of fees computed on value the fund cannot access. It's also the amount an LP redeeming at quarter-end would take out of the pockets of the LPs who stay, assuming the stock drifts down through the lock-up as post-lock-up supply gets priced in.
Note what the proposal would not do: hand you a formula. Topic 820 is deliberately technique-agnostic, so funds would apply judgment and document it. Valuation practice already has tools for this, most commonly option-based approaches that treat the cost of being unable to sell as the price of a protective put over the restriction period, sized by the stock's volatility and the remaining term. Higher volatility and a longer lock-up mean a bigger discount. A three-week restriction on a low-volatility name barely registers, while six months on a name trading at 90% implied volatility is a serious haircut.
Where the current rule bites hardest
The mismatch is worst when an observable price exists. If the security trades, Topic 820 pushes you to the quoted price, and ASU 2022-03 closed the door on adjusting it for a lock-up you signed. That is the post-IPO fact pattern.
For private, pre-IPO positions the tension is milder, because the fund is already building a Level 3 measurement from a valuation technique rather than reading a screen, and illiquidity is part of that work. Our walkthrough of [how funds mark startup positions under ASC 820](https://409.ai/articles/asc-820-level-3-fair-value-fund-portfolio-valuation) covers how those Level 3 estimates get built and defended, and it's the layer this proposal leaves largely alone. The proposal matters most at the moment a private position becomes a public one and the fund is still holding a piece of paper it can't sell.
This is not your 409A, and the discount is not your DLOM
If you're a founder reading this, keep the two systems apart, because they get conflated constantly.
What FASB is amending is investment company accounting: how a fund reports the fair value of what it owns to its own investors and auditors. Your option strike price is set under a different regime, the fair market value standard in the 409A regulations, in a valuation your company commissions. A fund writing down a locked-up position doesn't reset anyone's strike price, and it isn't evidence about your common stock. We've written about why [a 409A valuation and "fair market value" are not interchangeable terms](https://409.ai/articles/409a-valuation-vs-fair-market-value), and that distinction is doing real work here.
There's also a discount that looks superficially similar and isn't. A 409A applies a [discount for lack of marketability](https://409.ai/articles/discount-lack-marketability-dlom-409a-valuation) because the shares themselves have no market, an attribute of private stock that persists indefinitely. A lock-up discount under this proposal covers a defined contractual period on a security that does have a market. Same family of math, different question, different regime.
What changes for founders and finance teams
Three practical consequences if the amendments are finalized.
Your investors' reported marks on your company can move without anything happening at your company. In the quarters right after an IPO, a fund applying a lock-up discount will report a lower number than the closing price implies. When an LP or a board member asks why the mark dropped, the answer may be entirely about GAAP.
The reporting around your IPO gets busier. Lock-ups already shape the equity mechanics of going public, sitting alongside the liquidity event that makes [double-trigger RSUs finally taxable](https://409.ai/articles/double-trigger-rsus-ipo-taxation-409a), and they would now feed a fair value input on your investors' side too. Expect diligence questions about restriction terms and their remaining duration, since those are disclosure inputs.
Your own pre-IPO valuation discipline still carries the weight. Nothing in this proposal softens the SEC's interest in how you priced option grants on the way to the offering, which we covered in our piece on [cheap stock and the pre-IPO 409A](https://409.ai/articles/cheap-stock-pre-ipo-409a-sec-option-grants). If your company runs liquidity programs before an IPO, the transfer terms in those deals also affect how buyers and your own appraiser read the price, a point we get into on [tender offers and secondary sales](https://409.ai/articles/tender-offers-secondary-sales-409a-valuation).
What to do before year-end
If you run or audit a fund, the work is straightforward and worth starting before a final ASU forces it. Inventory every position subject to a contractual sale restriction, with the restriction's terms and remaining duration. Decide now what technique you'd use to size the discount, and write down the inputs and the reasoning so the first application isn't improvised under deadline. Ask your auditor how they'll want the discount supported and disclosed, and whether early application would be available. Then check what your fund documents say about NAV, because a methodology change that moves NAV touches subscriptions, redemptions, and fee calculations. Funds that need help building or defending a Level 3 measurement can start with our [ASC 820 valuation service](https://409.ai/products/asc-820).
If you're a founder or a startup CFO, you mainly need to recognize the change when you see it, and to resist the urge to read your investors' marks as a statement about your equity. That number is your 409A's job, and it comes from a [409A valuation](https://409.ai/products/409a) built for the IRS, not for a fund's NAV.
The part worth remembering
FASB spent 2022 concluding that a lock-up belongs to the holder rather than the asset, and 2026 conceding that for funds, that conclusion produced numbers their investors couldn't use. The fix is narrow on purpose: investment companies under Topic 946, equity securities with contractual sale restrictions, a disclosed discount. If your fund holds shares in a lock-up as of your next reporting date, the useful question isn't whether the standard changes, it's whether you can already show your work on what four months of not being able to sell is worth.