After a Year in the Public Eye, Reddit Files a Confidential IPO

After media, Wall Street, and government scrutiny over its involvement in the “meme stock” frenzy in early 2021, Reddit, Inc. (“Reddit”) finds itself in the spotlight again. (Taylor Tepper & Benjamin Curry, Forbes). This time, Reddit attracted attention from the Securities and Exchange Commission (“SEC”) by filing a confidential initial public offering (“IPO”) on December 15, 2021. (Id.; Reddit Announcements). Reddit’s valuation stands at approximately $10 billion after its most recent funding round garnered $700 million. (Taylor Tepper & Benjamin Curry, Forbes). However, the confidential nature of Reddit’s filing means that it is not required to publicly disclose financial data until far later than usual in the IPO process. (Sergei Klebnikov, Forbes).  

This confidential IPO method was born in 2012, when Barack Obama’s Jumpstart Our Business Startups (“JOBS”) Act allowed “emerging growth” companies with less than $1 billion in revenue to file IPOs confidentially. (Id.; The Wharton School; Kenneth Goldman, VentureBeat). The SEC subsequently removed the $1 billion revenue cap in June 2017, allowing all companies to file confidentially. (Sergei Klebnikov, Forbes). However, various methods exist for taking a company public besides a confidential IPO, including a direct listing, a special purpose acquisition company (“SPAC”) merger, or a traditional IPO. (Sofia Kunthara, Crunchbase). Common to all these methods, the primary benefit of taking a company public is the ability to raise capital through the sale of company shares to the public. (Jason Fernando, Investopedia).

In a direct listing, shareholders of a private company sell their stock to the public via an exchange without using costly underwriters and following the more stringent SEC requirements of a traditional IPO. (Shobhit Seth, Investopedia). In a SPAC merger, a shell company conducts a traditional IPO with the sole purpose of taking a private company public by acquiring or merging with it. (Julie Young, Investopedia). In a traditional IPO, underwriters perform due diligence to price IPO shares before the shares are offered for sale to the public. (Jason Fernando, Investopedia). Meanwhile, the issuing company must file a Form S-1 with the SEC, which includes a legal offering that the issuer must distribute to any individuals it has offered shares to or any individuals who buy the securities. Id. A confidential IPO also involves underwriters. (Sergei Klebnikov, Forbes). However, a confidential issuer is not required to file required SEC disclosures or announce the IPO date publicly until three weeks before the IPO date, compared to months before the IPO date for traditional issuers. Id.

Official reasons for why Reddit chose such a path to a public offering remain a secret because the company declared publicly that it is in a period of silence ahead of its confidential IPO. (Reddit Announcements). A confidential IPO’s primary attractions are that it allows an issuer to keep financial data private and push back an IPO date to exploit a more favorable market without worrying potential investors. (Id.; Kenneth Goldman, VentureBeat). By filing confidentially, Reddit could be signaling its intent to follow its peers and capitalize on these advantages. Other platforms like Uber, Lyft, and Airbnb filed confidentially in order to keep financial data private and have the option to move IPO dates. (Sergei Klebnikov, Forbes).

Furthermore, finance and accounting researchers at the University of Pennsylvania Wharton School of Business have also found that confidential IPOs reduce the chances of pre-IPO lawsuits. (The Wharton School). The scholars cite the opaqueness and shortened timeline of reviewing a filing company’s financials as the main obstacle to prospective investors filing pre-IPO lawsuits during a confidential filing. Id. This could point to another reason Reddit filed confidentially. By doing so, the company could potentially avoid costly pre-IPO lawsuits and preserve IPO value; the Wharton researchers found that, on average, each corporate lawsuit in the pre-IPO stage correlates with a 5.9% decrease in IPO proceeds. Id.

Reddit’s involvement in the 2021 “meme stock” frenzy could play a role in how investors view the company. In January 2021, discussions led by the three million Reddit users on the r/WallStreetBets “subreddit”—one of the website’s online forums—prompted investors to buy GameStop stock and call options. (Yun Li, CNBC). At the peak of the buying frenzy that ensued, GameStop’s stock price had risen 1,745% from the beginning of the year. (Pat Regnier, Bloomberg Businessweek). Part of the motivation behind Reddit users selecting GameStop and other “meme stocks” was to victimize Wall Street institutions that had short positions on GameStop, AMC Entertainment, and Bed Bath & Beyond. (Yun Li, CNBC). After Wall Street analysts’ predictions fell wide of the mark on these stocks, Congress held hearings about the dangers to the American economy “if tweets and posts do more to move stocks than material information.” (Id.; Mark Kolakowski, Investopedia). Interestingly, financial technology (“fintech”) commentators, such as GlobalData analyst Jaimani Pattani, believe that Reddit’s financial subreddit forums could provide value as young investors continue to flock to tools like Robinhood, Inc.’s trading platform and enter the stock market. (Eric Johansson, Verdict). Pattani views Reddit’s forums as venues for fintech firms to engage with younger investors to grow customer bases and gauge investment interests. Id.

 Some r/WallStreetBets members claim that Reddit is not as engaging as before the GameStop scandal, citing new users taking financial information rather than providing it. (Gunjan Banerji & Caitlin McCabe, Wall Street Journal). Metrics seem to confirm this decrease in engagement. In November 2021, “27,000 comments [populated r/WallStreetBets’] main page . . . down from about 47,000 a year before.” Id. Reddit’s latest daily active users figure from January 2021 (approximately 50 million) lags significantly behind social media giants Twitter (approximately 200 million) and Facebook (over one billion), potentially due to its old-fashioned comment board design. (Taylor Tepper & Benjamin Curry, Forbes).

While the public has some access to Reddit’s usage figures, financial disclosures will not be available to the public until three weeks before the unknown IPO date. (Sergei Klebnikov, Forbes). The mystery of Reddit’s finances could trigger a major disadvantage to confidential IPOs. According to the Wharton researchers, confidential filings often lead to underpriced shares due to investors equating lack of transparency with uncertainty. (The Wharton School). However, Reddit’s user metrics, though lower than other successful platforms , grew to 52 million in October 2020, an increase of 44% over the previous year. (Taylor Tepper & Benjamin Curry, Forbes). Reddit attracts users interested in the financial markets, and user discussions could prompt further financial movements. (Eric Johansson, Verdict).