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

SAN FRANCISCO (news agencies) — 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.

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.

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.

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?’”