Reddit has submitted its S-1 paperwork to go public, warning investors about the potential risks associated with “meme stock” scams on r/WallStreetBets.
The subreddit r/WallStreetBets, a community of 15 million retail traders, compares itself to “4chan with a Bloomberg Terminal.” It gained fame for orchestrating a short squeeze on GameStop stock in 2021, a defiant action that resulted in hedge firms losing billions of dollars. Due to its extreme volatility, the stock surged over 600% in a matter of days, leading to several trade halts. Retail traders attempted to imitate the GameStop situation by investing in other severely shorted companies such as AMC and Bed, Bath & Beyond, establishing the trend of trading “meme stocks,” with varying degrees of success.
The company stated in its S-1 filing that due to Reddit’s widespread recognition and the popularity of r/wallstreetbets among retail investors, along with retail investors having direct access to trading platforms, the market price and trading volume of their Class A common stock may face significant volatility. This volatility could be unrelated to the company’s business, macroeconomic factors, or industry fundamentals, potentially resulting in a loss of investment if shares cannot be sold at or above the initial offering price.
Reddit’s IPO may serve as the ultimate joke for Redditors, who see retail investment as a kind of online trolling. The firm said in its IPO filing that it plans to provide Reddit users and moderators the opportunity to purchase shares via its directed share program. This uncommon strategy allows community members to purchase shares at the initial public offering (IPO) price, similar to institutional investors. Participants will get precedence based on their karma, a metric that quantifies community engagement on Reddit.
Another risk issue for investors is Reddit’s potential inability to reach or sustain profitability in the future, as stated in the S-1 document. Reddit, although becoming prominent in online culture, has not been able to generate a profit. Reddit had a net loss of $90.8 million in 2023, contributing to the company’s total deficit of $716.6 million.
Reddit mentions r/WallStreetBets as a risk element in its IPO documentation.
