Amidst the peculiar behavior of stocks in early 2021, a noteworthy phenomenon emerged as retail investors, united through internet platforms, orchestrated a historic short squeeze on GameStop. The epicenter of this financial upheaval was the subreddit WallStreetBets and its Discord counterpart, where a legion of investors collaborated to drive GameStop’s stock price up a staggering 1,700 percent, resulting in the closure of the once-mighty hedge fund, Melvin Capital.
This marked the birth of the meme stock era, as Redditors, in the aftermath of the GameStop saga, playfully targeted struggling stocks reminiscent of mid-2000s nostalgia, including AMC, Bed Bath & Beyond, Blackberry, Redbox, and Nokia. The landscape of public markets witnessed bizarre fluctuations, courtesy of an army of retail investors armed with unfettered access to no-commission trading platforms.
However, as Reddit prepares to go public, it finds itself entangled in the very market forces catalyzed on its own site. In a strategic move, Reddit’s executives have devised a plan to maintain favor with their crucial stakeholders. Reddit recently unveiled a groundbreaking initiative: allocating coveted IPO shares to 75,000 of its most devoted users and moderators, typically reserved for institutional investors like hedge funds. This decision, according to Reddit CEO Steve Huffman, aims to reflect users’ deep sense of ownership over the communities they create on the platform.
As Reddit steps into the realm of public trading, it becomes the first social media company to do so since Pinterest in 2019. Unlike most other social media entities relying on user-generated content monetized through advertising, Reddit boasts an extensive, unpaid army of volunteer moderators who manage and enforce rules for various subreddits. Over time, clashes between Reddit’s management and its moderators, particularly over issues like charging developers for API access, have been a recurring theme.
By extending IPO shares to its dedicated users and moderators, Reddit appears to be banking on aligning their interests with the platform’s profitability. This move mirrors the strategy of granting employee stock options, aiming to ensure that those contributing to the platform’s success also have a vested interest in its financial well-being.
However, financial experts highlight potential risks associated with this strategy. Kelly Shue, a finance professor at Yale School of Management, suggests that while the intention is to align investors and moderators, a falling stock price could alienate these crucial contributors. Greg Martin, co-founder of Rainmaker Securities, acknowledges the brilliance of Reddit’s plan but emphasizes the importance of pricing the IPO correctly to manage the associated risks.
Reddit’s registration statement even explicitly recognizes the tension with the meme stock crowd as a potential risk, given the platform’s broad awareness and brand recognition, particularly through communities like r/wallstreetbets.
Skepticism persists among some experts, such as Kevin Mullally from the University of Central Florida, who questions whether offering shares to WallStreetBets members, known for their distinct market ethos, will truly alter their market influence. Even longtime Reddit moderator Robert Allam, while appreciating the gesture, remains cautious, expressing concerns about Reddit’s dependence on volunteer labor and highlighting that the initiative might be seen as too little, too late by some users and moderators. As Reddit navigates the complexities of going public, it remains to be seen whether this unconventional approach will prove a stroke of genius or carry unforeseen challenges.