Reddit is preparing to sell shares to the public. Here’s what you need to know
SAN FRANCISCO– Reddit, that vast, vibrant and sometimes chaotic repository of Internet discussions, on Monday forecast a price for its IPO shares that values the 18-year-old social media platform at up to $6.4 billion.
The offering also makes Reddit one of the first online companies to offer shares to its contributors – the “Redditors” who comment on the boards and the moderators who run them. That’s a break from traditional IPO practice, which typically involves selling initial shares to institutional investors and fund managers, who then trade the shares on the open market. Adding the company’s users to the mix could make for a much more vibrant offering, and not necessarily in a good way.
It could be an interesting ride.
Reddit plans to list 22 million shares at a price between $31 and $34, according to the latest version of the IPO prospectus it filed with the Securities and Exchange Commission on Monday. The company is expected to receive between $473.6 million and $519.4 million from the sale of approximately 15.3 million shares.
Reddit’s existing investors will sell an additional 6.7 million shares in the offering, raising between $208.4 million and $228.6 million for their own portfolios. Reddit itself won’t benefit from those sales.
Under standard IPO procedure, these shares will typically end up in a mix of mutual funds, hedge funds and other large investment groups, who will then sell them to their investor clients.
Reddit also plans to sell up to 1.76 million shares – about 8% of its total supply – to a mix of certain board members and so-called “friends and relatives” of certain board members and employees. Plus of course the moderators and Redditors who make Reddit what it is.
The wildcard here is that these stock buyers, who will pay the IPO price for their shares, will not be bound by “lock-up agreements” that require company officers and employees to hold their shares for a fixed period of time – possibly as long as six months . That means Redditors and moderators can immediately sell their shares if they want.
To start, consider the volatility of stock prices.
While it’s not clear from a perspective how many of those 1.76 million shares will end up in the hands of Reddit users, the number is likely large enough for those users to put meaningful pressure on Reddit’s stock price. The biggest concern is that a surge in demand for unlocked stocks could cause a sudden rise in the stock price, followed by an equally sharp decline once the initial excitement wears off and short sellers – investors who essentially bet that a stock will drop – start to gather.
That’s pretty much what happened with Robinhood Markets, which operates an easy-to-use and low-cost trading platform aimed at novice investors that also offers IPO stocks to its users. The company’s shares opened at $38 on its first day of trading in July 2021, shot up to $85 five days later, then fell back to around $40 after just six weeks. Robinhood closed at $16.86 on Monday.
“Handling this process incorrectly could result in (Reddit) alienating their most ardent supporters, potentially turning them into critics,” warned Deiya Pernas, co-founder of Pernas Research.
But Don Montanaro, chairman of trading platform Firstrade, argues that Reddit might not have had much choice but to go this route. “They run a business where their customers, their users, are their product,” he said. “It’s a case of, ‘What can we do differently? This is who we are, how can we not offer this to these people?’”
If you don’t have a Reddit account yet, you’re probably out of luck. The offer is only available to users who created an account as of January 1, 2024.
In addition, shares will be distributed to Redditors and moderators via a formula that takes into account their measurable contributions to the discussion boards. Redditors with high “karma” scores – a measure of their contributions to the community, such as posts that other Redditors find useful, funny or insightful – will be grouped into six priority levels for access to the stock offering.
Moderators who have taken a significant number of “moderator actions” are also assigned to those levels. Such actions can include anything from designing a new discussion group – known as a “subreddit” in the site’s jargon – to removing spam or duplicate posts, to enforcing subreddit rules. Moderators are also rated on membership trends in their subreddits.
None of this guarantees an individual a chance to buy shares if demand exceeds supply, although Reddit emphasizes in the prospectus that anyone who doesn’t get a chance to buy shares may be placed on a waiting list.