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Snap IPO Lock-Up Period Said To Be 12 Months; Why So Long?

Shanthi Rexaline

The much-awaited IPO of Snap Inc (NYSE: SNAP), the parent of ephemeral photo and video sharing platform Snapchat, is in the works. In an amendment to its Form S-1 filing Monday, the company revealed a longer lock-up period than is the wont, in an apparent reflection of the company's faith in the offering.

Locked Up For Way Too Loooong...

This company said in the amended filing that about 50 million shares of its Class A common stock purchased by investors in the offering will be subject to a separate lock-up agreement, which provides for a one-year restricted period following the date of the prospectus. This is opposed to the 150-day restricted period for the rest of the shares.

The company clarified that as of now, there were no binding commitments for investors to purchase these shares or enter into these agreements. The actual number of shares purchased by these investors in the offering or subject to these lock-up agreements may be more or less, the company added. Such agreements, according to the company, will reduce the freely tradable shares in the market. That said, the company indicated that it reserves the discretion to waive any of these lock-up agreements before the restricted period expires.

Related Link: Is Snapchat's Snap Another 'Junk' IPO?

What Does A Lock-Up Period Mean In An IPO?

An IPO lock-up period is a contractual restriction that forbids insiders from selling the shares for a period ranging from 90 to 180 days after the company goes public.

From this perspective, Snap's suggestion of a longer lock-up period signals strong demand for the IPO.

Significance Of Lock-Up Period

Lock-up periods guard the company's shares from facing a selling onslaught that can wreak damage to its valuation. Additionally, selling by insiders are viewed by the investing public as a lack of faith in the company's prospects. Thus, lock-up periods ensure preservation of confidence.

To understand this better, Facebook Inc (NASDAQ: FB), mandated a 120-day lock-up period for 271 million of its shares offered through its IPO. The first day after the lock-up period expired, Facebook shares dropped by 50 percent from its listing price.

Strong Demand Speculated

Snap is offering 145,000,00 shares of Class A common stock through the IPO and an additional 55,000,000 shares are to be offered by selling stockholders. The company expects to price the offering between $14 and $16 per share. The shares are to be listed on the NYSE under the ticker SNAP. The quantum of shares earmarked for the one-year lock-up period is about one-fourth of the size of the total offering.

Reuters reported, quoting people familiar with the process, that orders for the IPO have begun to come in at the high-end of its range and its book is already oversubscribed. The sources also indicated to Reuters that the 50 million shares earmarked for a one-year lock-up period are targeted at new Snap IPO investors, who do not currently have a stake in the company.

Argus initiated coverage of Snap Inc. pre-IPO with a $22 year-end price target.

Latest Ratings for FB

Date Firm Action From To
Feb 2017 Pivotal Research Downgrades Buy Hold
Jan 2017 Pacific Crest Reinstates Overweight
Jan 2017 Raymond James Upgrades Outperform Strong Buy

View More Analyst Ratings for FB
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