Reddit, which formally filed to go public on Thursday, is taking an unconventional approach to its IPO, analysts say, by making a portion of its shares available to some of its most loyal users before the general public. If history is any indication, this could provide mixed results for investors.
According to the social network, it will offer an unspecified number of shares to the site’s moderators. its S-1 form, more detailed information will appear later. Although companies typically reserve a portion of shares for retail investors, the vast majority of shares in an IPO initially go to institutional investors and the wealthiest individual investors. The public may eventually buy shares after the stock is listed on an exchange, but often the price will have already risen by then. In other words, an initial public offering is usually 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 spend most of their time running the site, said Kyle Stanford, an analyst at PitchBook. Combining their currently unpaid work with the company’s long-term performance can lead to even greater loyalty and good PR in the process.
“It’s unusual. That’s good goodwill,” Stanford says. “These community-built apps can do a lot of good.”
CEO and co-founder Steve Huffman noted this in the S-1: “Our users have a deep sense of responsibility for the communities they create on Reddit. This sense of ownership often extends throughout Reddit. We want this sense of ownership to be reflected in real ownership – for our users to be our owners. Becoming a public company makes that possible.”
But loyalty can come at a cost: If the share price falls after an IPO, individual investors are more likely to panic and sell, potentially creating a death spiral. Conventional thinking holds that institutional investors are more willing to ride out early complications, which can prevent some of this volatility.
A recent move to democratize IPOs backfired: In 2021, investing app Robinhood went public and made a much larger portion of its shares available to individual investors, but the price fell more than 8% on its first day of trading. The shares are currently trading at around $13.50 (less than half the IPO price) and reflect the company’s performance. considered “catastrophic””, and public goodwill towards the company began to wane.
Still, Reddit recognizes the risks, and there’s not necessarily a correlation between Robinhood’s stock price falling and offering the public more, Stanford says. After all, Reddit has become the go-to place for many retail investors to discuss stocks, which has contributed enormously to the success of companies like GameStop. Meme Stocks That Soared in 2021. Stanford expects the number of shares it will be awarded to be only a small portion of the total.
“I wouldn’t expect it to make the IPO better or worse, but they could make it a nice little extra,” he says. “They saw what happened in the threads on their platform. They are well aware of this possibility.”
“ride the wave”
Stanford said he hopes Reddit users with exposure to the stock also understand the risks of investing, including the length of the lock-up period. If they buy stock at, say, $25 per share, and the next day the stock price rises to $35, they won’t be able to make a profit right away. Meanwhile, prices may fall.
“If there is a two-month isolation period, they will have to ride the wave,” Stanford says.
“The market price and trading volume of our Class A common stock may experience extreme volatility for reasons unrelated to our underlying business or macroeconomic or industry fundamentals, which could result in the loss of all or part of your investment if you are unable to sell your shares. at the initial offering price or higher,” notes Reddit’s S-1.
The announcement comes as Google and Reddit also announced their intentions. “deepening” their partnershipV effort to do it “It’s easier to find and access the communities and conversations people are looking for on Reddit” through Google products like search.
Speaking of Google, the tech giant now known as Alphabet Inc. had its famous “bizarre” The 2004 IPO involved the auction of shares to both retail and institutional investors.
Let’s go Dutch
An IPO is traditionally underwritten by one or more investment banks, which certify the quality of the investment. Institutional investors who buy shares before an IPO usually have ties to the underwriters who set the initial share price, which Google management deemed unfair. Instead they used Dutch auction. Simply put, it is when a company collects bids from interested investors for the number of shares they want to buy and at what price, and uses those bids to determine the highest price at which the offering can be sold. It’s risky because if the public doesn’t think you’re worth much, then you’re not.
Due to a confluence of factors – bad press, the public not knowing what Google is doing, poor timing interview with Playboy this attracted the attention of the SEC – the IPO was a disappointment. Google went public at $85 per share, which is lower than the initial price the company expected. from 108 to 135 dollars. By the end of the first trading day shares rose 18% to over $100.– respectable, but, as studies have shown, average.
But this disappointment did not last long. By the end of 2004, the stock took off. However, the Dutch auction method, although used by several other companies in the US after Google, is not particularly popular.
Spotify had an unconventional IPO in 2018 when 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 buyers of shares will be able to place orders with the broker of their choice at any price they deem appropriate, and this order will be part of the exchange’s pricing process.” [New York Stock Exchange]”, Harvard Lawyers wrote in the case about the company’s offer.
Like Reddit, Spotify’s move was made in part to attract user attention and make the IPO process more transparent and inclusive. Spotify’s IPO was a success by ‘virtually all standards’, CNBC wrote a few months later. Airbnb is another company that had a successful IPO, allowing market users to buy shares at an early stage.
Other Silicon Valley companies have followed suit, and Reddit is hoping their IPO will be just as successful.
“We are going public to further our mission to become a stronger company,” Huffman wrote. “We hope that publicity will greatly benefit our community as well.”