Reddit's power users can buy into its IPO through a directed share program. Here's how DSPs work.
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- Companies with upcoming IPOs can offer directed share programs to qualifying groups of retail investors to buy IPO stock.
- Eligible investors must receive an invite from the company to participate, as shares are limited.
- Reddit is inviting select users and moderators to participate in its offer to buy company stock in March 2024.
Hoping to get in on Reddit's initial public offering? Unless you're a big investor, it's unlikely you'll be able to unless you are among a select group of power users on the social media platform.
Non-employed forum moderators and users (aka Redditors) can get their hands on Reddit's IPO at the same price as institutional investors through what's known as a directed share program. Reddit has started inviting Redditors meeting certain moderators or user criteria to participate.
Reddit is seeking a valuation of up to $6.5 billion for its much-anticipated IPO after filing to go public on February 22. It will be the first major tech IPO of 2024. The company is targeting a price range of $31 to $34 per share. Typically, only large institutional investors are able to participate in IPOs directly. Directed share programs like Reddit's allow companies to allocate shares to stakeholders who might otherwise miss out.
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"It's an attempt at engagement and trying to translate users of the platform into owners of the platform," says Will McDonough, chairman and founder of Corestone Capital. "Reddit is trying to activate its user base to become equity holders and therefore have a greater vested interest in the platform's success so that they continue to contribute to it. It's kind of like buying them off."
The deadline to pre-register is March 5, and Reddit plans to start trading on the New York Stock Exchange using the ticker symbol RDDT on March 11. Reddit Employees will also be eligible to start selling shares at this time.
What is a directed share program?
A directed share program (DSP) is an invitation-only program offered by companies going public so that a select group of investors gets access to shares at the IPO price.
Rather than buying shares through a broker, a directed share program allows investors to buy IPO stock directly from the company. Only people the company invites can participate in directed share programs. Usually, this involves specific regulatory restrictions, such as the number of shares an investor can purchase.
Companies may offer a directed share program to employees, vendors, or, in Reddit's case, loyal users and moderators.
"Internal teams, such as employees, are inherently vested in the success of a platform because their paycheck and healthcare are dependent on it. Whereas an independent user who leverages the platform remains to be proven whether or not they actually care," McDonough says. "It could blow up in the company's face or be a legendary story of commuting users."
Reddit isn't the first tech company to use directed share programs. In 2020, Airbnb offered US individuals who hosted guests during 2019 and 2020 access to participate in the company's IPO through a DSP at $68 per share. Uber also offered a DSP when it went public in 2019.
Airbnb's IPO was one of the largest in 2020, successfully selling 51 million shares and raising $3.5 billion. By the end of the first day, high demand increased the stock price by 140%, reaching $144.71 per share.
Uber's IPO, on the other hand, was less successful as the stock immediately decreased from its initial target of $45 per share and opened at $42 per share. With a target valuation ranging from $80 billion to $90 billion, it offered 180 million shares, raising only $8.1 billion.
The success of an IPO depends on the public's opinion of the company, the demand for shares, and investor's confidence. For example, Airbnb went public at the end of 2020 as people were desperate to travel, and vaccines for COVID-19 had just been announced. Whereas, for Uber's IPO, investor confidence in drive-sharing apps was low following Lyft's rough IPO launch less than two months prior.
Overall, DSPs can be a great opportunity for regular people to access shares that would otherwise only be available to high-net-worth individuals and institutional investors. However, investing in an IPO comes with risk, so only those with a high risk tolerance should participate.
How a directed share program works
Typically, with an IPO, a certain portion of shares are set aside for key stakeholders and specific high-net-worth individuals. Directed share programs work the same way. During the underwriting process, a portion of shares is set aside for a designated group of people — often family, friends, or employees — to participate in the IPO.
You can only participate in a company's directed share program if invited. You must place a conditional buy order on a specified number of shares. But it won't go through until it becomes a buy order and becomes allocated to your account until the company's registration becomes effective.
Conditional orders can be modified until they become buy orders. Once they become buy orders, you're obligated to purchase. However, there's no guarantee that you'll receive your requested shares. The number of available shares for IPOs is limited, and you may not be able to get your hands on it if the demand is high.
The risk involved with directed share programs
One of the risks associated with directed share programs is that a DSP may harm the company's IPO by causing the IPO value to inflate. Moreover, if many DSP participants start to sell their shares immediately after the IPO, the stock price could drop sharply.
McDonough points out the risk of something like that happening with Reddit.
"For years, Reddit has been private and illiquid. Now, suddenly, shareholders can sell," he said. "That becomes selling pressure that has to be offset by market demand. And that market demand has to come from equity holders who are believing the growth story."
Shares purchased through DSP often require buyers to hold the stock for a set amount of time, decreasing liquidity. Reddit employees are allowed to start selling shares once it officially goes public.
The best method to manage risk in your investment portfolio is by diversifying your asset allocation within and across market sectors. That way, you're less likely to be subject to large losses if a single company drops in value.
How to participate in Reddit's directed share program
Reddit began rolling out directed share program pre-registration invitations to certain users and moderators on February 22, 2024. Redditors started receiving emails explaining the upcoming IPO, how to participate in the DSP, and additional program requirements.
Invitations were rolled out to three groups of Redditors based on the following criteria:
Reddit website/screenshot
Reddit karma is the score calculated by a Redditor's total upvotes on posts and comments, minus any downvotes. Reddit uses this score to determine if someone is contributing to the platform positively and to prevent spam accounts and mayhem.
Moderators with 5000+ mod actions and users with 200k+ karma were the first to receive pre-registration invites. Mods with less than 500 mod actions and users with karma scores below 25k did not receive invitations.
Reddit IPO stock will be distributed on a first-come, first-served basis, and the number of shares is limited, so you won't want to miss your chance. On March 1, all Redditors with active accounts created on or before January 1, 2024, could start pre-registering without an invitation. Remember, there's no guarantee that you'll receive all (or any) of your requested shares.
Reddit's email invitations also specified that to participate, you must:
- Be a current US resident
- Have a valid social security or permanent resident number
- Be at least 18 years old
- Provide full legal name and an email address
- Not be a current or former Reddit employee
Confirmed Redditors will receive an email from Reddit's DSP Administrator (noreply@redditmail.com) asking for additional information to confirm eligibility after the last day of pre-registration on March 5. A waitlist will be opened if pre-registration fills up before this date.
Directed shares program FAQs
How can Reddit users participate in the company's IPO?
Reddit users (aka Redditors) can participate in the company's IPO through the company's directed share program. Qualifying users and moderators started receiving pre-registration invitations starting February 22. On March 1, all Reddit users with an account opened on or before January 1, 2024, became eligible to request shares. However, there is no guarantee everyone will receive shares due to possible high demand.
How does making a directed share purchase work?
When you purchase stock through a directed share program, you buy a share directly from the company rather than through a broker. First, you'll place a conditional order on the number of shares you want to purchase. Once the company's registration becomes effective, you're order will become buy orders and can be allocated to your account.
Are directed share programs open to everyone?
Directed share programs are only available to a select group of people the company deems eligible. Eligible participants typically must receive an invite from the company to participate in the direct share program.
How do I request directed share program shares?
If you receive an invitation from the company to participate in their directed share program, you can request conditional shares. Once the company's registration becomes effective, conditional shares become regular buy orders that can be allocated to your account. Depending on the regulations involved with specific DSPs, you may be limited to a certain number of shares.
Are directed stock purchase plans good?
Directed stock purchase plans are a good way for individual investors to access exclusive IPO stock that is generally only available to high-net-worth individuals and institutions. However, IPO stock can be risky, so only experienced investors with high-risk tolerances should consider participating in direct stock purchase plans.
Is Reddit's DSP worth it?
Going public allows companies to raise capital, enhance visibility, and increase liquidity. But these efforts are only profitable if the public agrees with the company's move to go public.
"They are turning users into owners," says McDonough. "Now these people are holding shares, and if they don't just trade them in and dump them, it could be a really strong, passionate equity ownership base."
The subreddit, r/WallStreetBets, has 15 million devoted Redditors publically debating whether or not to participate in the DSP. While some users are interested in the prospects the IPO has to offer, others are threatening to short Reddit's stock in the hope that it declines.
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