Reddit’s upcoming initial public offering (IPO) is set to have a unique twist that allows some of its most active users to purchase shares of the company’s stock. While this may sound like an intriguing concept at first, it could potentially introduce additional risks for traditional investors. The social media company’s decision to include Reddit moderators and users in the IPO through a directed share program differs significantly from the typical allocation of shares to institutional investors.
The S-1 filing for the IPO acknowledges the deep sense of ownership that Reddit users feel towards the communities they have built on the platform. By allowing these users to become shareholders, Reddit aims to further enhance this ownership experience. However, the filing also highlights the potential risks associated with this decision. The participation of Reddit users in the IPO could lead to increased market volatility for the company’s Class A common stock. Unlike traditional IPO investors who often agree to lock-up agreements restricting immediate share sales, Reddit users participating in the IPO will not be subjected to such restrictions. This lack of lock-up agreements could result in unpredictable fluctuations in the stock price.
Reddit users have already demonstrated a strong interest in trading volatile stocks, as evidenced by the meme stock frenzy in 2021 driven by the WallStreetBets chat room. The encouragement to bid up stocks like GameStop and AMC Entertainment showcases the speculative nature of these users’ trading behaviors. Allowing these same users to participate in Reddit’s IPO could potentially amplify this speculative trading activity and further contribute to market volatility.
The filing indicates that Reddit will invite eligible users to participate in the IPO based on their community contributions and reputation scores, known as “karma.” Shares will be allocated through a tiered system, with higher karma users being given priority. While this system aims to reward active and valuable contributors to the platform, it also introduces a level of subjectivity into the allocation process. Depending on how karma is calculated and interpreted, there could be concerns about favoritism or bias in the selection of IPO participants.
Reddit’s decision to involve its users in the IPO through a directed share program presents a novel approach to shareholder engagement. However, this unique ownership structure also brings inherent risks, particularly in terms of market volatility and speculative trading activity. As the IPO unfolds, it will be critical to monitor the impact of Reddit users’ participation on the company’s stock price and overall market dynamics. By introducing a new level of user involvement in the IPO process, Reddit is venturing into uncharted territory that may reshape traditional perceptions of shareholder ownership and engagement.