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With Lock-Up Expiration Looming, Snap Gets Excluded by a Major Index Provider Over Voting Rights

By Evan Niu, CFA - Jul 28, 2017 at 4:39PM

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FTSE Russell is now imposing a 5% minimum voting rights hurdle for new index inclusions. Will other index providers follow suit?

Tomorrow's the day when Snap (SNAP 4.59%) will see the first lock-up expiration associated with its IPO. That means that when shares begin trading next week, there will be an awful lot more of them to go around.

Specifically, we're talking about another 400 million shares held by CEO Evan Spiegel, CTO Robert Murphy, and early investor Lightspeed Ventures, according to JPMorgan analyst Doug Anmuth. There's another lock-up that expires in mid-August, which will free another 782 million shares that are held by other employees. And at the end of August, another batch (20 million shares) will be freed. Compare that to Snap's current float, which is approximately 188 million shares, and you'll see why investors should be concerned about all those shares hitting the market in short order, which could potentially push the stock even lower.

Woman wearing Snap Spectacles

Image source: Snap.

Two pending decisions

Meanwhile, there has been debate within numerous index providers on whether or not to include Snap in various indexes. In June, MSCI released a brief study regarding non-voting shares in equity indexes to clients and solicited feedback (known as opening or conducting a "consultation") as it continues to evaluate potential inclusion. For new potential index constituents (like Snap), MSCI "proposes not to include non-voting shares in the MSCI GIMI and the MSCI US Equity Indexes in the cases when company level 'voting power' of listed shares is less than 25%." The Class A Snap shares that trade publicly get no votes whatsoever, so the voting power of listed shares is 0%. MSCI has not finalized a decision yet.

S&P Dow Jones similarly opened a consultation on the issue in April, asking members of the investment community to weigh in. For example, the Council of Institutional Investors responded and expressed its belief that any company whose only listed share class lacks votes "should not be eligible for inclusion in an index." S&P Dow Jones subsequently reopened the consultation through the end of June, and the CFA Institute chimed in with the same stance: "No, we do not believe that shares with no voting rights should be included in an index." Seeing as how S&P Dow Jones operates two of the most widely followed equity indexes in the U.S., its decision will be particularly important.

No Snap for you

One index provider just made a decision yesterday: FTSE Russell. (FTSE Russell also held a consultation period in May.) In order to be eligible for inclusion, new potential constituents must allow public shareholders to collectively have at least 5% voting power. While that's a pretty modest hurdle, it's a start and better than nothing.

FTSE Russell said that nearly 70% of respondents wanted some type of minimum hurdle, with 55% of those pushing for a voting hurdle of 25%. Existing index constituents will have a five-year grace period through September 2022 to comply and adjust their capital structures.

Why this matters for Snap

Index inclusion inevitably creates demand for a stock, since all of the funds that track the index are required to buy shares of the constituents in order to track the index. That can create a sort of stabilizing effect in the short term. For example, if Snap were to have theoretically scored a prompt index inclusion, that would trigger buying demand from funds that could potentially offset any selling pressure related to the massive increase in supply that's about to happen.

If other index providers, including the two prominent ones mentioned above, similarly decide to impose minimum hurdles for public voting rights -- which they should, in the name of corporate governance -- it will be yet another blow to Snap.

Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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