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Can Snap fall even more as lockups expire?

Snap will unlock trading restrictions on early investors and employees in the next few weeks.

Since going public, Snap Inc. has faced increasing competition from Facebook Inc., a $2 billion-plus loss in its first earnings report and a sliding stock price. Now, the Snapchat parent company faces yet another challenge, and historical trends show investors have cause for concern.

Close to a billion shares could hit the market soon, as Snap SNAP, -3.53% early investors and employees are allowed to sell their stock thanks to lockup expirations. The release of new shares following an initial public offering typically pressures prices, but especially so for unprofitable, young, venture-backed companies that see many more shares released than in the actual IPO—all of which describes Snap.

An IPO lockup prevents large shareholders and employees and executives in the company from selling shares for a period of 90 to 180 days through a contractual obligation with the company. Several factors can make a stock more volatile as lockups expire, including its maturity when its goes public.

One factor working against the Snapchat-parent company is its history of venture-capital investment. Researchers who looked at initial public offerings executed in the decade after the dot-com bust found that companies with venture backing suffered more as lockups expire.

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The academic study looked at IPO lockups from 2001 to 2011, and showed that all venture-backed companies studied suffered a decline in the five days surrounding a lockup expiration. Overall, the stocks fell 1.4% more than non-VC-backed companies, when controlling for firm factors and IPO specifics.

That average drop around the lockup may sound small, but it is the result of a large sample size, academics say. Overall, there’s wide variation in the range of stock movement around a lockup expiration.

“It’s actually not that rare to see a 15% drop because a lot of these recent IPOs are very volatile stocks,” said Jay Ritter, a professor at the University of Florida who studies IPOs.

A more mature company with a proven business model is more stable than a company like Snap, which really only began generating revenue in 2015. Snap’s performance is more of a question mark because it is unprofitable, most recently posting a $2.2 billion loss, and does not have a clear path to profitability.

“It’s easier when the valuation of the company is a little less disputable,” said Kathleen Smith, principal at Renaissance Capital, a manager of IPO-focused ETFs.

The number of shares hitting the market also matters...