Upvoted

On 20 March Reddit priced its shares at $34, and a good many of its users learned that they could own a piece of the place. The company reserved up to 1.76m of the 22m shares on offer, or 8%, for eligible users and moderators.^{1SEC EDGARReddit, Inc. final prospectus, Form 424B420 Mar 2024} Participants needed an account opened on or before 1 January 2024, a home in America, an age of at least 18 and “good standing”. They were invited in six tiers ranked by karma, the site’s own score for the approval of strangers.^{1SEC EDGARReddit, Inc. final prospectus, Form 424B420 Mar 2024} Few flotations have been shaped partly by upvotes.

The wider offering was modest. Reddit and its selling stockholders sold shares worth about $748m, of which some $519m went to the company, at a value of $6.4bn.^{2Associated Press, via ClickOrlandoReddit poised to make its stock market debut after IPO prices at $34 per share amid strong demand20 Mar 2024,3InvestingLiveReddit shares debut in public markets21 Mar 2024} The price was at the top of its bankers’ target range.^{2Associated Press, via ClickOrlandoReddit poised to make its stock market debut after IPO prices at $34 per share amid strong demand20 Mar 2024} Reddit has been here before: it filed for a listing in December 2021 and withdrew, when its cumulative losses stood at $467m.^{2Associated Press, via ClickOrlandoReddit poised to make its stock market debut after IPO prices at $34 per share amid strong demand20 Mar 2024} They have since grown to $717m.^{2Associated Press, via ClickOrlandoReddit poised to make its stock market debut after IPO prices at $34 per share amid strong demand20 Mar 2024} Meta, to put that in scale, is worth more than $1.2trn and has about $135bn in annual revenue, against under $1bn for Reddit.^{1SEC EDGARReddit, Inc. final prospectus, Form 424B420 Mar 2024,2Associated Press, via ClickOrlandoReddit poised to make its stock market debut after IPO prices at $34 per share amid strong demand20 Mar 2024} Reddit is a small company with a large reputation, and the listing prices in some of the latter, which investors should remember when the shares open.

The numbers are better than the history. Revenue was $804.0m in 2023, up 21% from $666.7m, while the net loss narrowed from $158.6m to $90.8m.^{1SEC EDGARReddit, Inc. final prospectus, Form 424B420 Mar 2024} About 73.1m people visited daily in the last quarter of 2023.^{1SEC EDGARReddit, Inc. final prospectus, Form 424B420 Mar 2024} Reddit also hopes to sell what those people write. Its prospectus argues that “Reddit data is a foundational piece to the construction of current AI technology and many LLMs”, and says the firm is in the “early stages” of licensing it to others.^{1SEC EDGARReddit, Inc. final prospectus, Form 424B420 Mar 2024} Users supply the text for free, moderators police it for free, and the owners now collect a fee from machines that read it. We think the offering of shares to those users is therefore the least a fair-minded company could do, and the most it was likely to do.

The case against is that retail investors are a poor choice of audience. They are fond of the product and thinly informed about the accounts, and a brand that people love can be a stock they overpay for. That is fair, and the structure limits the harm. The user allotment is small beside the institutions, who took most of the rest of the offering,^{2Associated Press, via ClickOrlandoReddit poised to make its stock market debut after IPO prices at $34 per share amid strong demand20 Mar 2024} and shares bought through the programme are not subject to the lock-up that binds insiders.^{1SEC EDGARReddit, Inc. final prospectus, Form 424B420 Mar 2024} Users who regret a purchase may sell it, which is more than can be said for a vote. The institutions that took the rest presumably did the sums.

A harder objection concerns who runs Reddit. After the offering the holders of Class B stock will control about 97.1% of the voting power, and Steve Huffman, the co-founder and chief executive, “may have the ability to control the outcome of matters submitted to our stockholders”, the prospectus says.^{1SEC EDGARReddit, Inc. final prospectus, Form 424B420 Mar 2024} A user who buys a share gets an economic claim, not a say. Mr Huffman’s letter to investors describes Reddit as “a community that rewards candor and honest advice”.^{1SEC EDGARReddit, Inc. final prospectus, Form 424B420 Mar 2024} That is a fine description of a forum, but a poor one of a company in which the public holds a minority of votes and a few holders hold nearly all of them.

None of this makes the offering a mistake. Letting customers share in the upside is pro-market, and cheaper than buying their goodwill. Investors should take the shares as they take any stock, with a view on price. The users should keep their karma, which at least cannot be diluted.