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

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

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Ruvic cube | Reuters

Reddit's IPO will include a special feature that will allow 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 be given the opportunity to participate in the offering through a targeted stock program. This is unusual for companies as IPOs are primarily purchased by institutional investors.

“Our users have a deep sense of ownership over the communities they create on Reddit. This sense of ownership often extends throughout Reddit. We see this in our users' passion for their communities and their desire to make Reddit as great as possible, and in their disapproval when we let them down. We want this sense of ownership to translate into real ownership – so that our users are our owners. The conversion into a listed company makes this possible. With this in mind, we are excited “We invite the users and moderators who have contributed to Reddit to join our investors in purchasing shares in our IPO,” the filing reads.

But the so-called Redditors were also mentioned several times in the “Risk Factors” section of the submission. In addition to warning statements about the company's dependence on its users, participation in an IPO was highlighted as its own risk.

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

Many IPO investors formally or informally agree to a lock-up period, meaning they do not sell their stock allocation immediately after trading begins. However, the Reddit users participating in the IPO will not be subject to a lock-up agreement, the filing said, which could increase the stock's volatility. The filing did not specify what percentage of shares would be allocated under the program.

Reddit users have already proven that they have a penchant for trading volatile stocks. The site's WallStreetBets chat room was the epicenter of the meme stock craze in 2021, as users urged each other to raise stocks like GameStop And AMC Entertainment.

As for which Reddit users can participate, the filing states that Reddit invites eligible users and then allocates shares through a tiered system based on “karma (a user's reputation score reflecting their community contributions),” which is measured by other users.