By DAVID HAMILTON (AP Business Writer)
SAN FRANCISCO (AP) — Reddit, a large, lively and sometimes chaotic hub of internet discussion, is expected to have a value of up to $6.4 billion when it goes public on the stock market.
Reddit is also one of the first online companies to offer shares to its contributors — the “Redditors” who comment on its boards and the moderators who manage them. This is different from the usual IPO practice, where initial shares are mainly sold to institutional investors and fund managers. Bringing the company’s users into the mix could make the offering much livelier, though not necessarily in a positive way.
It could be an interesting journey.
WHAT ARE THE DETAILS OF THE IPO?
Reddit plans to list 22 million shares at a price between $31 and $34, according to the most recent version of the IPO prospectus it filed with the Securities and Exchange Commission. The company stands to take in between $473.6 million and $519.4 million from the sale of roughly 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.
As per standard IPO procedure, those shares will usually end up with a mix of mutual funds, hedge funds and other major investment groups who will then sell them to their investor clients.
WHAT’S DIFFERENT ABOUT THE REDDIT IPO?
Reddit also plans to sell up to 1.76 million shares — about 8% of the total offering — to a mix of certain board members and so-called “friends and family members” of certain board members and employees. Additionally, moderators and Redditors who contribute to Reddit will have the opportunity to purchase shares.
The uncertain factor here is that the stock purchasers, who will pay the IPO price for their shares, won’t be required to hold their shares for a specific period of time, unlike company officers and employees. This means Redditors and moderators will be able to sell their shares immediately if they choose.
WHAT ARE THE RISKS OF THIS SETUP?
To begin with, consider share-price instability.
It's not clear how many of those 1.76 million shares will end up in the hands of Reddit users, but the number is likely large enough for them to have a significant impact on Reddit’s share price. The main concern is that a surge of demand for shares that aren’t locked up could cause a sudden increase in the share price, followed by a sharp decline when the initial excitement diminishes and short-sellers — investors who bet a stock will decline — start to take action.
This scenario is similar to what occurred with Robinhood Markets, a user-friendly and low-cost trading platform targeting new investors that also provided IPO shares to its users. The company’s stock started at $38 on its first day of trading in July 2021, soared to $85 five days later, and then dropped back to around $40 after just six weeks.
Deiya Pernas, co-founder of Pernas Research, cautioned that if Reddit mishandles this process, it could end up pushing away its most devoted supporters and possibly turning them into critics.
However, Don Montanaro, president of the trading platform Firstrade, contends that Reddit may not have had much choice but to take this path. He stated, “They’ve been operating a business where their clients, their users, are their product. It’s a situation of, ‘What else could we do? This is who we are, how could we not offer this to these people?’”
CAN I PARTICIPATE IN THIS OFFERING?
If you don’t already have a Reddit account, you’re probably out of luck. The offering is only available to users who had established accounts as of January 1, 2024.
Moreover, shares will be allocated to Redditors and moderators based on a formula that considers 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, amusing or insightful — will be grouped into six priority tiers for access to the stock offering.
Moderators who have taken significant numbers of “moderator actions” will similarly be categorized into those tiers. Such actions can include anything from creating a new discussion group — also known as a “subreddit” in the site’s language — to removing spam or duplicate posts, to enforcing subreddit rules. Moderators will also be evaluated on membership trends in their subreddits.
However, this does not guarantee an individual a chance at purchasing shares if demand exceeds supply, although Reddit emphasizes in the prospectus that anyone who isn’t awarded a shot at buying shares can join a waitlist.
ARE THERE ANY OTHER RISKS I SHOULD KNOW ABOUT?
Reddit has not had a profitable year since it was founded in 2005. After losing nearly $159 million in 2022, the platform generated $804 million in sales last year, up nearly 21% from 2022, narrowing its losses to about $91 million.
In its filing, Reddit’s leadership did list several avenues of revenue it’d like to expand on in order to reach profitability, including an interest in business deals where AI companies pay to access databases of human-written text that AI models can use to refine their ability to converse, answer questions and produce written work and images on request.
However, the company revealed on Friday that the Federal Trade Commission has opened an inquiry into the platform’s dealings in this space.
Reddit stated in the filing, “Given the new nature of these technologies and commercial arrangements, we are not surprised that the FTC has expressed interest in this area. We do not believe that we have engaged in any unfair or deceptive trade practice.”
