Reddit’s Unique IPO Twist: Users to Buy Stock, Adding Risk for Investors

Reddit’s forthcoming initial public offering (IPO) will introduce a unique aspect that grants certain highly engaged users the opportunity to purchase the company’s stock, potentially introducing added risk for other investors.

In its S-1 filing unveiled Thursday afternoon, the social media platform disclosed a directed share program, enabling select Reddit moderators and users to partake in the IPO. This move diverges from the norm, where IPOs are predominantly acquired by institutional investors.

“Our users possess a profound sense of ownership over the communities they cultivate on Reddit. This sentiment often extends to the entirety of Reddit, evident in their fervent dedication to their communities and their aspiration for Reddit’s excellence, alongside their disappointment when expectations are unmet.”

Redditors' participation in IPO may increase market stock volatility
Redditors’ participation in IPO may increase market stock volatility, warns Reddit’s filing.

“We aspire for this sense of ownership to translate into tangible ownership – for our users to become our stakeholders. Going public facilitates this vision. Thus, we are enthusiastic about extending an invitation to the users and moderators who have contributed to Reddit to purchase shares in our IPO, alongside our investors,” the filing articulated.

However, these “Redditors” garnered multiple mentions within the “Risk Factors” section of the filing. Apart from cautionary remarks regarding the company’s reliance on its user base, the IPO participation itself was underscored as a distinct risk. “Redditors’ involvement in this offering could lead to heightened market price volatility of our Class A common stock,” the filing cautioned.

WallStreet Bets users are eligible for Reddit IPO stock allocation
WallStreet Bets users are eligible for Reddit IPO stock allocation based on karma score.

Typically, IPO investors commit to a lock-up period, refraining from selling their share allocation immediately after trading commences. Contrarily, Reddit users participating in the IPO will not be bound by a lock-up agreement, potentially exacerbating stock volatility, as stated in the filing. The percentage of shares to be allocated through this program was not disclosed.

Reddit users have already demonstrated their penchant for trading volatile stocks, exemplified by the WallStreetBets chat room’s pivotal role in the 2021 meme stock frenzy, where users rallied each other to drive up stocks such as GameStop and AMC Entertainment.

Regarding eligibility for participation, the filing specified that Reddit would extend invitations to eligible users, allocating shares based on a tiered system determined by “karma” – a user’s reputation score reflecting their community contributions – as evaluated by other users.

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
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