Analysts say Reddit, which officially filed to go public on Thursday, is taking an unconventional approach to its IPO by exposing some of its shares to some of its most loyal users before the general public. If history is any indication, this could produce mixed results for investors.
The social network said it would offer an unspecified number of shares to the site's moderators its form S-1, more details will follow at a later date. Although companies typically reserve some shares for retail investors, the majority of shares in IPOs initially go to institutional investors and the wealthiest individual investors. Once the stock is listed on an exchange, the public can eventually buy, but often the price has risen by then. In other words, an IPO is typically not open to the public.
Reddit's move is to appeal to its loyal user base and create a deeper sense of ownership among those who already invest much of their time managing the site, says Kyle Stanford, an analyst at PitchBook. Tying their currently unpaid work to the company's long-term performance could lead to even greater loyalty – and therefore good PR.
“It is unusual. “It’s a beautiful thing of goodwill,” says Stanford. “There are many benefits that these community-driven apps can bring.”
CEO and co-founder Steve Huffman noted this in the S-1: “Our users have a deep sense of ownership over the communities they create on Reddit. This sense of ownership often extends throughout Reddit. We want this sense of ownership to translate into real ownership – so that our users are our owners. Conversion into a stock corporation makes this possible.”
But loyalty could come at a price: If the stock price falls after the IPO, individual investors are more likely to panic and sell, potentially leading to a death spiral. Institutional investors, the traditional thinking goes, have a stronger sense of weathering early complications, which can prevent some of this volatility.
A recent move to democratize IPOs backfired spectacularly: In 2021, investment app Robinhood went public, making a much larger portion of its shares available to retail investors, but the price fell more than 8% on its first day of trading. Shares are currently trading for around $13.50 – less than half the IPO price – reflecting the company's performance classified as “catastrophic”.“And public goodwill for the company has stalled.
However, Reddit is aware of the risks and there isn't necessarily a connection between Robinhood's falling stock price and offering more to the public in the first place, Stanford says. Finally, Reddit has become the go-to source for stock discussions for many retail investors, which has contributed massively to the performance of companies like… GameStopThe Meme stock that skyrocketed in 2021. Stanford therefore assumes that the amount of shares made available to them will only represent a small portion of the total amount.
“I wouldn't expect it to make the IPO better or worse, but it's a nice little addition that they can do,” he says. “They saw what happened in the threads on their platform. They are hyper-aware of this possibility.”
'Ride the wave'
Stanford said he hopes Redditors with access to stocks are also aware of the risks of investing, including the length of the lock-up period. For example, if they buy at $25 per share and the stock goes up to $35 the next day, they won't be able to make money right away. And prices could fall in the meantime.
“If there’s a two-month hold, they’re going to have to ride the wave,” Stanford says.
“The market price and trading volume of our Class A common stock could be subject to extreme fluctuations for reasons unrelated to our underlying business or macroeconomic or industry fundamentals, which could result in you losing all or a portion of your investment if “You cannot sell your shares at or above the initial public offering price,” notes Reddit’s S-1.
The submission takes place in the same way Google and Reddit also announced this “Deepening” their partnershipin one (n Effort to make it “Easier to discover and access the communities and conversations people search for on Reddit” across Google products like Search.
Speaking of Google, the tech giant now known as Alphabet Inc. had its own famous company “quirky” The IPO in 2004 involved auctioning shares to both retail and institutional investors.
Go Dutch
An IPO is traditionally guaranteed by one or more investment banks that certify the quality of the investment. Institutional investors who buy in before the IPO typically have ties to the underwriters who set the initial stock price, which Google leadership found unfair. Instead they used a Dutch auction. In simple terms, this is when a company solicits bids from interested investors for how many shares it wants to buy and at what price, and uses those bids to determine the highest price at which the offering can be sold . This is risky because if the public thinks you're not worth much, then you aren't.
Due to a confluence of factors – bad press, the public didn't really know what Google was doing, bad timing Interview with playboy This caught the attention of the SEC – the IPO was a disappointment. Google went public at $85 per share, below the company's original price expectation $108 to $135. Until the end of the first trading day The stock rose 18% to over $100– respectable, but as research has shown, about average.
But this disappointment didn't last long. At the end of 2004, the share price soared. However, the Dutch auction method is not particularly popular, although, according to Google, it is used by some other companies in the US.
Spotify had a non-traditional IPO in 2018 in which it opted for a direct listing, or allowing existing shareholders to sell their shares directly to the public rather than through underwriters. Then, “any potential buyer of stocks could place orders with the broker of his or her choice at the price he or she considered appropriate, and this order would be part of the price-setting process in the market.” [New York Stock Exchange]“, Harvard Lawyers wrote in a case study about the company's offer.
Like Reddit's move, Spotify's move was made in part to appeal to its user base and make the IPO process more transparent and inclusive. “By almost any measure,” Spotify’s IPO was a success, CNBC wrote a few months later. Airbnb is another company that pulled off a successful IPO while allowing market participants to buy in early.
Other Silicon Valley companies have followed suit, and Reddit hopes the IPO will be a similar success.
“We are going public to advance our mission and become a stronger company,” Huffman wrote. “We hope the IPO will also bring significant benefits to our community.”