Reddit lists WSB as a risk factor for its IPO

Reddit's upcoming initial public offering (IPO) will offer a unique opportunity for some of its active users to purchase the stock, potentially increasing the risk for other investors.

In its S-1 filing on Thursday, the social media company disclosed that certain Reddit moderators and users would be able to participate in the offering through a directed share program. This approach deviates from the norm, as IPOs are typically dominated by institutional investors.

"Our users feel a strong sense of ownership over the communities they build on Reddit. This ownership often extends to Reddit as a whole. We witness this in our users' dedication to their communities, their aspiration for Reddit to be exceptional, and their disappointment when we fall short. We aim for this sense of ownership to translate into actual ownership — for our users to become our owners. Going public enables this. With this objective, we are thrilled to offer shares in our IPO to the users and moderators who have contributed to Reddit, alongside our investors," the filing stated.

However, these "Redditors" were also mentioned in the "Risk Factors" section of the filing. Alongside warnings about the company's reliance on its users, the IPO participation was identified as a separate risk.

"Redditors' participation in this offering could lead to increased volatility in the market price of our Class A common stock," the filing cautioned.

Many IPO investors commit to a lock-up period, agreeing not to sell their allotted shares immediately after trading commences. Yet, Reddit users involved in the IPO will not be bound by a lock-up agreement, potentially adding to stock volatility, the filing indicated. The document did not specify the percentage of shares allocated through this program.

Reddit users have demonstrated an appetite for trading volatile stocks. The platform's WallStreetBets chat room was pivotal in the meme stock frenzy of 2021, as users encouraged each other to boost stocks like GameStop and AMC Entertainment.

Regarding eligibility, Reddit will invite qualified users and then allocate shares using a tiered system based on "karma (a user's reputation score that reflects their community contributions)" as evaluated by other users.