According to news sources, the popular online forum Reddit has recently announced its plans to go public, with an expected evaluation of up to $6.4 billion.

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.

This could potentially be an enjoyable experience.

According to the latest version of the IPO prospectus filed with the Securities and Exchange Commission on Monday, Reddit intends to offer 22 million shares at a price range of $31 to $34. This would result in a potential revenue of $473.6 million to $519.4 million from the sale of approximately 15.3 million shares.

Reddit’s current shareholders will offload an extra 6.7 million shares during the offering, potentially generating anywhere from $208.4 million to $228.6 million for their personal portfolios. Reddit as a company will not reap any profit from these transactions.

According to the standard IPO process, these shares will usually be distributed among a combination of mutual funds, hedge funds, and other prominent investment groups, who will then sell them to their clients.

The social media platform Reddit intends to offer 1.76 million shares for sale, which accounts for approximately 8% of the total offering. These shares will be sold to a combination of board members, their acquaintances known as “friends and family,” and certain employees. Additionally, the moderators and users of Reddit play an integral role in shaping the platform.

The unique factor in this situation is that the individuals buying these stocks at the IPO price will not be obligated to adhere to “lock-up agreements,” which typically mandate company executives and staff to retain their shares for a specific duration, possibly up to six months. This grants Redditors and moderators the freedom to promptly sell their shares, if desired.

Firstly, consider the fluctuation of stock prices.

The exact amount of 1.76 million shares that will be owned by Reddit users is uncertain, but it is expected to be significant enough to influence Reddit’s stock value. The concern is that an influx of demand for unlocked shares could cause a rapid increase in share price, followed by a sharp decrease once the initial excitement settles and short-sellers step in.

Unfortunately, Robinhood Markets experienced a similar situation. The company, which provides a user-friendly and affordable trading platform for beginner investors, also gave its users the opportunity to purchase IPO shares. On its first day of trading in July 2021, the stock opened at $38 but quickly surged to $85 five days later. However, after only six weeks, the stock sharply fell back to around $40. As of Monday, Robinhood’s stock closed at $16.86.

Improperly managing this procedure may lead to (Reddit) losing the loyalty of their biggest advocates, which could potentially transform them into detractors,” cautioned Deiya Pernas, one of the founders of Pernas Research.

However, according to Don Montanaro, the chief executive officer of Firstrade, Reddit may have been forced to take this course of action. He believes that because Reddit’s users are essentially their source of income, they had no other option but to offer this service. Montanaro states, “It’s a matter of our identity and obligation to provide this to our audience.”

I’m sorry, but if you don’t currently have a Reddit account, you won’t be able to join. This opportunity is only open to those who had created accounts prior to January 1, 2024.

In addition, Redditors and moderators will receive shares based on a formula that takes into consideration their notable contributions to the discussion boards. Redditors with high “karma” scores, which reflect their impact on the community through helpful, amusing, or insightful posts, will be divided into six tiers of priority for the stock offering.

Moderators with a large amount of moderator actions will also be divided into these categories. These actions may involve creating a new discussion group, removing spam or repeated posts, or enforcing subreddit guidelines. Moderators will also be evaluated based on the growth of their subreddit communities.

There is no guarantee that an individual will be able to buy shares if there is more demand than supply. However, Reddit states in the prospectus that those who were not given the opportunity to buy shares can join a waitlist.

Source: wral.com