Reddit said the price and volume of its stock could “experience extreme volatility for reasons unrelated to our underlying business”
Beware the apes, Reddit $RDDT told the world in its IPO documents, though not in such explicit terms. Put simply, the company warned potential investors that one of its subreddits, the infamous r/WallStreetBets, could make its stock price and volume extremely volatile — and there’s little Reddit can do about it.
Reddit listed r/WallStreetBets as one of the possible risks to investing in the company in its S-1 form on Thursday, referencing the subreddit’s role in the meme stock craze of 2021, where retail investors banded together to raise the price of struggling companies like GameStop $GME and AMC. The goal of r/WallStreetBets back then was to screw over professional investors on Wall Street and make them lose money for betting against certain companies.
It’s entirely possible that the everyday people on r/WallStreetBets, a subreddit of 15 million retail investors who refer to themselves as “apes” and “degenerates,” and other online forums could do the same thing with Reddit’s stock, the company stated.
Reddit writes:
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...
The volatility could cause people to lose all or part of their investment, the company explained, if they are unable to sell their shares at or above the IPO price. The long-term effect of movements like those propelled by r/WallStreetBets is already documented, with the takeaway being that surges of interest and heavy investment don’t necessarily bring success to companies over time.
During the meme stock boom of 2021, GameStop’s price rose from less than $5 at the beginning of January to a high of $350 in a matter of days, only to nosedive again days later. Nearly all of the gains on GameStop’s stock have evaporated three years later, with the company trading at $13.36 at close on Thursday. The same can be said for AMC, which in 2021 reached a high of $70 after starting the year at less than $10. Today, AMC shares are worth $4.42.
Reddit has already announced that it is planning on allowing its most loyal users and moderators to buy stock in its IPO — an unusual move, as stock in an IPO is typically reserved for professional and rich investors—in a directed share program, meaning that there is a possibility that people on r/WallStreetBets could be the first to invest in the company. Furthermore, shares purchased by users and moderators will not be subject to a lockup, the period after an IPO where insiders and early investors are banned from selling their stock to prevent the price from going down.
The company hasn’t revealed how many shares are reserved for its users yet, only stating that eligibility will be based on user contributions to Reddit. Reddit will measure moderator contributions “by membership and moderator actions on our platform,” according to the IPO filing, and measure user contributions based on the amount of karma they have.
As for the people on r/WallStreetBets, many appeared to agree with the company’s warning on their influence. The top post on the subreddit on Friday morning — “Reddit lists WSB as a risk factor for its IPO 😏” — had thousands of comments as of the publication of this article. Comments that suggested shorting the stock had thousands of upvotes, while others warned that Reddit would permaban the subreddit if they messed with its stock price.
“This could be f—king wild,” one user said.
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