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Feb 29, 2024

Reddit warns IPO investors about its own users, so could meme-stock mania return?

Social media platform will allow users to take part in listing via share program

Reddit, the community-based social media platform, filed its long-awaited IPO prospectus last week, which included some unique risks that revive memories of meme-stock mania from the height of the pandemic.

The site hosts thousands of niche discussion groups, which are set up and moderated by volunteers. In a nod to the community’s role, Reddit says in the filing it will allow users and moderators to take part in the IPO via a special share program.

The issue is that Reddit users have history when it comes to stock market investing. It was, of course, the platform’s r/WallStreetBets sub-Reddit that kicked off wild price swings in a series of small caps during 2021.

Some stocks rose 30 times in less than a month, while the drama led to the downfall of hedge fund Melvin Capital Management, which had bet against Reddit’s army of retail investors.

With the site going public, however, it could itself become the focus of speculative trading. Among the risks in the prospectus, the company warns: ‘Redditors’ participation in this offering could result in increased volatility in the market price of our Class A common stock.’

Reddit will need a plan to deal with such an eventuality, but other companies should also take note. A big surge in retail investing would likely affect a group of issuers, as it did with the original meme stocks three years ago.

Analysis at the time showed that Reddit posts about individual stocks can impact trading volume, share price and share registers, with small caps most at risk.

Companies are likely better prepared than in 2021, however. One upshot of the r/WallStreetBets phenomenon was that IR teams spent more time thinking about their retail investors and how to communicate with them.

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