Reddit’s initial public offering (IPO) is shaping up to be a notable event, not only due to the fact that the company has yet to turn a profit, but also because of its unique approach to involving its community of users and moderators.
In their latest filing with the Securities and Exchange Commission (SEC), Reddit has revealed their plan to sell approximately 22 million shares, with an estimated price range of $31 to $34 per share. This could result in a potential fundraising of $748 million if the stock sells at the higher end of the range.
However, the initial public offering risks being volatile, as Reddit has decided to allow its community members to immediately sell their shares, rather than being held to the usual lock-up agreements. These agreements typically prevent investors from selling their shares for six months after the IPO.
This move sets the stage for Reddit to potentially become a “meme stock,” a term that originated from the infamous GameStop short squeeze in early 2021. This event was orchestrated by a group of Reddit users from the community r/WallStreetBets.
The Redditors banded together to take on hedge funds that had shorted GameStop’s stock by over 100%. Their collective efforts were aimed at driving up the stock’s price and forcing the hedge funds and other investors to cover their shorts, rather than taking losses as the stock experienced a surge due to Redditors purchasing shares.
The Redditors’ plan proved successful, resulting in the stock surging over 600% in just a matter of days. Due to its volatility, trading in GameStop’s stock was even halted multiple times.
With Reddit now allowing its community members to participate in the IPO, there is once again the potential for the stock to be manipulated, possibly in Reddit’s favor, through the collective actions of Redditors.
On the other hand, things could also go awry for Reddit as the company has acknowledged the potential risks associated with the involvement of the r/WallStreetBets community in their IPO.
“Given the broad awareness and brand recognition of Reddit, including as a result of the popularity of r/wallstreetbets among retail investors, and the direct access by retail investors to broadly available trading platforms, the market price and trading volume of our Class A common stock could experience extreme volatility for reasons unrelated to our underlying business or macroeconomic or industry fundamentals, which could cause you to lose all or part of your investment if you are unable to sell your shares at or above the initial offering price.”
In their updated filing, Reddit has stated that Redditors participating in the directed share program will have the freedom to sell their shares at any time.
The company’s document reads, “Shares purchased through the directed share program will not be subject to the terms of the lock-up agreement or market standoff restrictions.”
A total of 8% (1,760,000 shares) of Reddit’s Class A common stock will be made available through this program, offered to 75,000 eligible Reddit users and moderators, certain board members, as well as friends and family of employees and directors.
Reddit has announced that Redditors who have created an account before January 1, 2024, may be eligible for the directed share program, as long as they are based in the U.S. and are above 18 years of age. These participants will be divided into six phased priority tiers, based on their reputation (or in Reddit lingo, their karma score), or their contributions as moderators.
Given that only a limited number of shares are being offered through this program, if demand exceeds capacity, a waitlist will be provided.
Reddit initially filed their S-1 document in February, announcing their plans to go public. This made it the first notable tech IPO of the year, and the first consumer social IPO since Pinterest in 2019.
Despite Reddit’s large scale, with 267 million weekly active users across more than 100,000 communities, the company has been struggling to turn a profit on both a GAAP and adjusted basis.
In a more recent development, Reddit has revealed a new revenue strategy involving the licensing of its data to AI tool-building entities. This could potentially bring in $203 million over the span of two to three years, depending on the terms of individual deals.
Reddit will make its debut on the New York Stock Exchange (NYSE) under the ticker symbol “RDDT.”
