Reddit’s IPO should be interesting to watch — and not just because the business remains unprofitable, but also because of how the company has chosen to bring in its community of active users and moderators into its public markets debut. In a new SEC filing, Reddit’s IPO involves around 22 million shares, priced between $31 to $34. In addition, the IPO could be volatile given that Reddit will allow its community members to sell their shares immediately, instead of being subject to the usual lock-up agreements that typically prevent investors from selling shares for six months after the IPO.
Other outlets reported Reddit would raise up to $748 million at a valuation of nearly $6.5 billion. However, the company is selling 15 million shares — only a portion of that 22 million — to raise up to $519 million, it said. The company isn’t going to make money from the selling shareholders — the remaining 7 million shares.
The move sets up Reddit to become a meme stock — a term coined in reference to the wild GameStop short squeeze of 2021, which was driven by a group of Reddit users on its community r/WallStreetBets. The users had taken on the hedge funds that had shorted GameStop’s stock by over 100% by working collectively to buy the stock. The goal was to push the funds and other investors to cover their shorts instead of taking losses as the stock began rallying thanks to Redditors’ buying of shares. The gambit worked as the stock jumped over 600% within days, with trading halted a number of times due to its volatility.
By allowing the Reddit community to buy into the IPO, there’s again potential for the stock to be manipulated — this time, possibly in Reddit’s favor — by Redditors’ collective action.
However, things could also go poorly for Reddit on this front, given that the company listed r/WallStreetBets as a risk factor in the IPO.
Wrote Reddit in its S-1 filing:
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 its new filing, the company indicates that the Redditors in its directed share program will be able to sell at any time.
“Shares purchased through the directed share program will not be subject to the terms of the lock-up agreement or market standoff restrictions,” the document reads.
Eight percent (1,760,000 shares) of Reddit’s Class A common stock will be offered through this program to 75,000 eligible Reddit users and moderators, certain board members, and friends and family of employees and directors. Redditors who created an account before January 1, 2024, are potentially eligible for the directed share program, provided they are U.S.-based and 18 years old or older. They’ll be invited to participate in “six phased priority tiers,” Reddit says, based on their reputation (or in Reddit lingo, their karma score), or their contributions as moderators.
Because only a set amount of stock is being made available through this program, if demand outweighs capacity, a waitlist will be offered.
Reddit first filed its S-1 in December, which was made public in February, signaling its intention to go public and making it the first significant tech IPO of the year and the first consumer social IPO since Pinterest in 2019. However, the company struggles to turn a profit on both a GAAP and adjusted basis, despite its scale, which sees the site attracting 267 million weekly active users engaging across its more than 100,000 communities.
More recently, Reddit announced a new revenue strategy involving the licensing of its data to various entities building AI tools for $203 million over two- to three-year periods, depending on the individual deals’ terms.
Reddit will debut on the NYSE under the ticker symbol “RDDT.”
Updated 3/11/24, 12:07 p.m. ET with details around share sales from Reddit with respect to the amount being raised.
Reddit cites r/WallStreetBets as a risk factor in its IPO filing
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