Reddit is about to go public and plans to allocate some shares to platform users

Author: Nicholas Megaw, Hannah Murphy, FT Chinese

Reddit reported over $800 million in sales and a narrowing loss as it released its long-awaited prospectus ahead of its initial public offering, outlining plans to allocate a portion of shares to retail investors and social network users.

After two years of stagnation, the listing of the first major tech group in 2024 will test the strength of the U.S. IPO market. The company is set to list on the New York Stock Exchange early next month under the ticker symbol RDDT.

The company stated that the number of shares sold to retail and Reddit users will be "considerable."

Co-founder and CEO Steve Huffman said in the prospectus, "We hope that going public will also bring meaningful benefits to our community. Our users have a deep sense of ownership over the communities they create on Reddit. This sense of ownership often extends across all of Reddit."

In its most recent private funding round in 2021, Reddit was valued at $10 billion, but some investors have since cut that valuation by about 50%.

The prospectus shows that Reddit, headquartered in San Francisco, had sales of $804 million in 2023, a 21% year-over-year increase. The company, once known as a bastion of free speech, derives most of its revenue from advertising, which has forced it to more closely regulate the darker sides of the platform in recent years. In 2023, the company's net loss decreased from $159 million to $91 million, but it has never turned a profit.

The platform claims to have 267.5 million active users each week, engaging across more than 100,000 subreddits, which are various forums based on personal topics and interests, the most famous of which is the WallStreetBets trading forum.

Reddit stated that it will use a "targeted stock plan" to allocate shares to long-term users (or "redditors") and will sell shares to a broader retail investment community through apps like Robinhood and SoFi.

The company warned that involving an unusually large number of retail traders in the listing could lead to increased stock price volatility and potentially replicate the "meme stock" price behavior that caused a brief surge in Robinhood's stock shortly after its IPO in 2021.

The prospectus noted, "Initial interest is high… this could lead to unsustainable market prices, in which case the market price of our Class A common stock may decline over time."

In addition to advertising, Reddit is also seeking to diversify its revenue, such as charging third parties for access to its data, which was previously free. Additionally, Reddit announced on Thursday that it has reached an agreement with Google, which will display "Reddit content in new ways across Google products," while allowing the search engine to use Reddit posts to train its AI models. According to Reuters, the agreement is worth about $60 million annually.

Reddit is also looking to generate revenue by formalizing some markets that appear on the site, such as subreddits where users pay each other for photo editing requests or selling sneakers.

According to the prospectus, an affiliated entity of OpenAI CEO Sam Altman holds over 5% of the outstanding shares prior to the IPO. The document states that Altman was a member of Reddit's board during the 2021 funding round.

More than two years ago, Reddit first submitted a confidential version of its prospectus, but its IPO plans were disrupted due to rising interest rates and declining tech stock valuations that froze most new stock market activities.

However, in recent months, as investor confidence in peak interest rates has grown and stock indices have repeatedly hit new highs, IPO activity has been warming up.