Reddit is preparing to sell shares to the public. Here's what you need to know

SAN FRANCISCO — Reddit, that vast, lively and sometimes chaotic repository of internet discussion, is expected to carry a valuation up to $6.4 billion when it conducts its initial public offering on the stock market.

The offering also makes Reddit 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. That's a break with traditional IPO practice, in which initial shares are typically sold to institutional investors and fund managers who then begin trading the stock on the open market. Adding the company's users to the mix could make for a much livelier offering, and not necessarily in a good way.

It could be an interesting ride.

WHAT ARE THE DETAILS OF THE IPO?

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. 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.

Per standard IPO operating procedure, those shares will typically end up with a mix of mutual funds, hedge funds and other major investment groups who will then hawk them to their investor customers.

WHAT’S DIFFERENT ABOUT THE REDDIT IPO?

Reddit also plans to sell up to 1.76 million shares — roughly 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. Plus, of course, the moderators and Redditors who make Reddit what it is.

The wild card here is that these stock purchasers, who will pay the IPO price for their shares, won't be bound by “lock-up agreements” that require company officers and employees to hold their shares for a fixed period of time — potentially as long as six months. That means Redditors and moderators will be able to sell their shares immediately if they wish.

WHAT ARE THE RISKS OF THIS SETUP?

For starters, think share-price volatility.

While it’s not clear from the perspective just 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 exert meaningful pressure on Reddit's share price. The main concern is that a surge of demand for shares that aren't locked up could create a sudden run-up in the share price, followed by an equally sharp decline once the initial excitement wears off and short-sellers — investors who effectively place bets that a stock will decline — begin to gather.

That's pretty much what happened with Robinhood Markets, which operates a simple-to-use and low cost trading platform aimed at novice investors that also offered IPO shares to its users. The company's stock opened at $38 on its first day of trading in July 2021, shot up to $85 five days later, then plunged back to roughly $40 after just six weeks.

“Mishandling this process 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, president of the trading platform Firstrade, argues that Reddit may not have had much choice but to go this route. “They've been running a business where their clients, their users, are their product,” he said. “It's a case of, ‘What else could we do? This is who we are, how could we not offer this to these people?'”

CAN I GET IN ON 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.

Beyond that, shares will be distributed to Redditors and moderators via a formula that accounts for 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 likewise be sorted into those tiers. Such actions can include anything from designing a new discussion group — aka a “subreddit” in the jargon of the site — to removing spam or duplicate posts, to enforcing subreddit rules. Moderators will also be rated on membership trends in their subreddits.

None of this guarantees an individual a chance at buying shares if demand exceeds supply, although Reddit emphasizes in the prospectus that anyone who isn't awarded a shot at purchasing shares can join a waitlist.

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.

But the company said Friday that the Federal Trade Commission has opened an inquiry into the platform's dealings in this space.

“Given the novel nature of these technologies and commercial arrangements, we are not surprised that the FTC has expressed interest in this area,” Reddit wrote in the filing. “We do not believe that we have engaged in any unfair or deceptive trade practice.”