Snap Inc (NYSE: SNAP) made its highly anticipated IPO debut on Thursday. Whenever such a large tech company goes public, it’s an important milestone in the company’s history and an occasion to celebrate for insiders and investors.
But a stock’s first trading day also serves as a transition point. Once that first public trading session is over, investors should turn their attention to the next big date that looms over any large IPO: lock-up expiration.
WHY LOCK-UPS ARE IMPORTANT
Most IPOs have a lock-up period ranging anywhere from 90 to 180 days after the IPO date. During that time, insiders, majority shareholders, and anybody else who had access to the stock before it traded on a public exchange are restricted from selling their shares of the stock on the public market. The purpose of the lock-up period is to reassure new public investors that they will not be buying into the stock at the same time a flood of company insiders are dumping their shares en masse. Once the stock has a period of time to stabilize on the public market, the lock-up expiration allows insiders to begin cashing out of their holdings, if they want.
The reason why IPO investors should be concerned about lock-up expiration is because stocks, like any other asset in a free market, are priced based on supply and demand. Once insider shares are no longer restricted, a stock’s float (public market supply) dramatically increases. Of course, this expiration only becomes an issue if insiders actually sell their shares, which they often do not. But the risk of insider dumping can be a bit higher at tech companies like Snap, where so many of the insiders are relatively young and may have a hard time resisting the temptation to become instant multi-millionaires.
LOCK-UP EXPIRATIONS CAN BE UNPREDICTABLE
Much like any other major market catalyst, lock-up expirations can be…
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