Reddit, which officially filed to go public on Thursday, is taking a nontraditional approach with its IPO, analysts say, by making a portion of its shares available to some of its most loyal users before the the general public. If history is any indication, that could yield mixed results for investors.

The social network said it would offer site moderators an undetermined number of shares, according to its Form S-1, with more details coming at a later date. Though companies typically reserve some shares for retail investors, the vast majority of stock at the IPO initially goes to institutional investors and the wealthiest individual investors. The public can eventually buy in after the stock is listed on an exchange, but often the price will have risen by then. In other words, an initial public offering isn’t, usually, 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 contribute a great deal of their time to managing the site, says Kyle Stanford, an analyst at PitchBook. Connecting their currently unpaid work to the company’s longterm performance could engender even greater loyalty—and some good PR in the process.

“It’s unusual. It’s a nice goodwill thing,” says Stanford. “There’s a lot of benefit that these community-driven apps can receive.”

CEO and cofounder Steve Huffman noted as much in the S-1: “Our users have a deep sense of ownership over the communities they create on Reddit. This sense of ownership often extends to all of 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 this possible.”

But loyalty could come at a cost: If the stock price sinks after the IPO, individual investors are more likely to panic and sell, potentially creating a death spiral. Institutional investors, traditional thinking goes, have a stronger stomach for riding out early complications, which can prevent some of that volatility.

A recent move to democratize IPOs backfired spectacularly: In 2021, the investing app Robinhood went public and made a much larger portion of its shares available to individual investors, but the price dropped more than 8% on the first day of trading. Now trading for around $13.50—less than half of the IPO price—shares have reflected a company performance deemed “disastrous,” and public goodwill for the company has faltered.

That said, Reddit is aware of the risks, and there isn’t necessarily a correlation between Robinhood’s falling stock price and offering more to the public up front, says Stanford. After all, Reddit has become the go-to spot for stock talk for many retail investors, which contributed massively to the performance of companies like GameStop, the meme stock that soared in 2021. Stanford expects the amount of shares made available to them to be a small portion of the total, then.

“I wouldn’t expect it to make the IPO better or worse, but it’s a nice little additive they can do,” he says. “They’ve seen what’s happened in threads on their platform. They’re hyper-aware of the possibility.”

‘Ride the wave’

Stanford said he hopes Redditors with access to shares also are similarly aware of the risks of investing, including how long the lock-up period is. If they buy in at, say, $25 per share and the stock pops to $35 the next day, they can’t immediately cash in. And prices could fall in the meantime.

“If there’s a two-month lock-up period, they have to ride the wave,” says Stanford.

“The market price and trading volume of our Class A common stock could experience extreme volatility for reasons unrelated to our underlying business or macroeconomic or industry fundamentals, which could cause you to lose all or part of your investment if you are unable to sell your shares at or above the initial offering price,” Reddit’s S-1 notes.

The filing comes just as Google and Reddit also announced they are “deepening” their partnership, in an effort to make it “easier to discover and access the communities and conversations people are looking for on Reddit” via Google products, like search.

Speaking of Google, the tech giant, now known as Alphabet Inc., had its own famously “quirky” IPO back in 2004 that involved auctioning off shares to retail and institutional investors alike.

Going Dutch

An IPO is traditionally underwritten by one or more investment banks that certify the quality of the investment. Institutional investors who buy in ahead of the IPO typically have connections to those underwriters, who determine the initial share price, which Google’s leadership found unfair. Instead, they used a Dutch auction. Put simply, this 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. This is risky because if the public doesn’t think you’re worth much, well, you’re not.

Due to a confluence of factors—bad press, the public not really knowing what Google was doing, an ill-timed interview with Playboy that caught the attention of the SEC—the IPO was a disappointment. Google went public at $85 per share, lower than the company’s original price expectation of $108 to $135. By the end of the first trading day, the stock rose by 18% to over $100—respectable, but as research has shown, about average.

But that disappointment didn’t last long. By the end of 2004, the stock took off. Still, the Dutch auction method, while used by a few other companies in the U.S. post-Google, is not super popular.

Spotify had a nontraditional 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 prospective purchasers of shares could place orders with their broker of choice, at whatever price they believed was appropriate, and that order would be part of the price-setting process on the [New York Stock Exchange],” Harvard lawyers wrote in a case study about the company’s offering.

Like Reddit’s move, Spotify’s was done, in part, to appeal to its user base and make the IPO process more transparent and inclusive. “By almost any standard” Spotify’s IPO was a success, CNBC wrote a few months later. Airbnb is another company that led a successful IPO while allowing marketplace users to buy in early.

Other Silicon Valley companies have followed suit, and Reddit hopes its IPO will be a similar success.

“We are going public to advance our mission and become a stronger company,” Huffman wrote. “We hope going public will provide meaningful benefits to our community as well.”

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