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Does Reddit want to be a meme stock?

As Reddit prepares to go public, its executives have concocted a plan to stay in their most important stakeholders’ good graces.

Does Reddit want to be a meme stock?
[Source photo: Maxime LEVREL/Pexels; Jakub Porzycki/NurPhoto via Getty Images]

In early 2021, stocks began behaving strangely. Retail investors, coordinating on internet platforms, decided to band together and coordinate their stock trades—chiefly, they plotted on Reddit.

On the subreddit WallStreetBets, as well as on its sister channel on the messaging app Discord, investors organized a historic short squeeze of GameStop in early 2021, an effort that bounced the video game retailer’s stock price up 1,700 percent in a matter of weeks and eventually caused the closure of a once-successful hedge fund Melvin Capital.

With that the meme stock phenomenon was born. In the fallout from the GameStop saga, Redditors memed a series of struggling stocks that reeked of mid-2000s nostalgia, such as AMC, Bed Bath & Beyond, Blackberry, Redbox, and Nokia. Suddenly, flagging businesses were experiencing odd movements on the public markets thanks to a legion of retail investors with unfettered access to no-commission trading platforms.

But, as Reddit itself prepares to go public next month, its executives are grappling with the very market forces once incubated on their site. Mainly, they’ve concocted a plan to stay in their most important stakeholders’ good graces.

Reddit recently announced it will give coveted IPO shares to 75,000 of its most loyal users and moderators, shares typically reserved for institutional investors like hedge funds. “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,” Reddit CEO and cofounder Steve Huffman wrote in a letter as part of the company’s federal registration statement. “We want this sense of ownership to be reflected in real ownership—for our users to be our owners.”

Reddit is the first social media company to go public through an IPO since Pinterest did so in 2019, and like other social media companies it relies on user-generated content that it doesn’t pay for, monetized through advertising. But unlike most other social media companies, it also relies on a massive, unpaid workforce of volunteer moderators who manage and enforce rules for individual subreddits. Over the years, Reddit’s management has repeatedly clashed with its mods, perhaps most recently over Reddit’s plans to charge developers to access its API, which allows outsiders to build services around Reddit’s ecosystem, such as the popular client Apollo, which shut down in response to the new policy. In fact, a number of popular subreddits went private to protest this policy this past summer.

By offering IPO shares to its most avid users and mods, Reddit is betting that this might appease them. After all, IPOs are typically priced to reward these investors with what’s called an “IPO pop” in stock price. This strategy isn’t that different from granting employee stock options—getting the people doing the work for you to also care about the underlying profitability of the business could, in an ideal world, align the interests of many different stakeholders.

Kelly Shue, a finance professor at the Yale School of Management, believes the goal is to get mods to buy into a profit-oriented business strategy for Reddit moving forward. “I think that’s the intention: to align investors, align mods, and financially reward them,” she says. “But there’s this big risk that if the stock price falls, not only is that generally bad for a firm, but it’s going to really alienate a set of mods that could withdraw their volunteer services.”

Greg Martin, the cofounder and managing director at Rainmaker Securities, thinks Reddit’s plan to involve users and mods is “brilliant,” but admits there’s lots of risk with the plan and there will be a lot of pressure to get the pricing of the IPO right. “Reddit is a meme stock platform, and one of the biggest risks of this IPO was infuriating users who might say Reddit is selling out,” Martin says. “By enabling users to participate in the IPO, and become owners, they become incentivized to hype the stock positively and will be more favorably inclined.”

Still, the tension with the meme stock crowd isn’t hypothetical—in fact, Reddit listed it as a risk in its registration statement:

“Given the broad awareness and brand recognition of Reddit, including as a result of the popularity of r/wallstreetbets among retail investors, and the direct access by retail investors to broadly available trading platforms, 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.”

Kevin Mullally, a finance professor at the University of Central Florida, is skeptical of Reddit’s strategy. “The WallStreetBets members, in particular, seem like their objective function differs from that of what we’d consider ‘rational’ investors,” he says. “They seem to enjoy exerting power over the market, so I’m not sure that giving them a few shares will really change that ethos.”

Robert Allam is a longtime Reddit mod, known widely by his username GallowBoob. He’s mostly retired from moderating on the platform, but he still ranks second in the all-time karma rankings (the system of rewarding points for popular posts and comments). As such he’ll be in the tier of users with access to the most IPO shares. Allam says he’s excited for the opportunity to invest, but in some ways it’s the least Reddit could do for users and mods it depends upon.

“I like that they’re giving back, but I would’ve much preferred that they gave back differently much earlier,” he says. “In theory it’s a cool initiative, but it’s so late and so little that it’s hard to celebrate it.”

Allam is also fundamentally nervous about Reddit’s business and its reliance on volunteer labor: “I can’t think of a single company on the scale of Reddit that relies on as much free volunteer work as Reddit does.”

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