Reddit will let users buy its IPO, but warns that they could make the stock riskier

Investing

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Dado Ruvic | Reuters

Reddit’s initial public offering will include a quirk that allows some of its most active users to buy the stock. That could make the deal riskier for other investors.

On Thursday afternoon, the social media company’s S-1 filing revealed that some Reddit moderators and other users would get the opportunity to participate in the offering through a directed share program. This is unusual for companies, as IPOs are bought primarily by institutional investors.

“Our users have a deep sense of ownership over the communities they create on Reddit. This sense of ownership often extends to all of Reddit. We see this in our users’ passion for their communities, their desire for Reddit to be as amazing as possible, and in their disapproval when we let them down. We want this sense of ownership to be reflected in real ownership — for our users to be our owners. Becoming a public company makes this possible. With this in mind, we are excited to invite the users and moderators who have contributed to Reddit to buy shares in our IPO, alongside our investors,” the filing said.

But the so-called Redditors also earned several mentions in the “Risk Factors” section of the filing. In addition to cautionary statements about the reliance of the business on its users, the IPO participation was highlighted as its own risk.

“Redditors’ participation in this offering could result in increased volatility in the market price of our Class A common stock,” the filing said.

Many IPO investors, either formally or informally, agree to a lock-up period, which means they will not sell their allocation of shares right after trading begins. But the Reddit users that participate in the IPO will not be subject to a lock-up agreement, the filing said, which could add to volatility in the stock. The filing did not say what percentage of the shares would be allocated through the program.

Reddit users have already proven that they have a taste for trading volatile stocks. The site’s WallStreetBets chat room was the epicenter of the meme stock craze in 2021, as users urged one another to bid up stocks such as GameStop and AMC Entertainment.

As for which Redditors will be able to participate, the filing said that Reddit will invite eligible users and then allocate shares through a tiered system based on “karma (a user’s reputation score that reflects their community contributions)” as measured by other users.

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