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Reddit may let users buy IPO shares. Is this the best idea?

According to a Wall Street Journal report, social media company Reddit plans on selling a sizeable portion of its IPO shares to the users of its platform. The report also claims that the company is reserving an unknown number of shares for up to 75,000 of its most prolific users.

EquityZen Head of Market Insight Brianne Lynch joins Yahoo Finance to discuss Reddit's IPO plans and how the company may fare after implementing this IPO strategy.

Lynch warns of potential risks with the strategy:
"This definitely doesn't come with[out] risks, and there are few examples of this. You know, Airbnb (ABNB) is a success story. We saw they allowed marketplace users to buy into the IPO. That IPO traded up 113% the first day. It was a great win for them. Uber (UBER) did the same and that traded down. Robinhood (HOOD) did the same and that traded down. It's now down 60% since that IPO. I think there's additional risk just given the social nature of their platform. Are these power users going to be mad if the stock trades down and what is that going to do for overall stock performance?"

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

JULIE HYMAN: Well, Reddit is reportedly looking to place a substantial amount of its IPO shares in the hands of its users. That's according to the Wall Street Journal. With this unique approach from the social media platform, what could this mean for its public debut?

Here to discuss this and more is Brianne Lynch, EquityZen Head of Market Insight. [? Brianne ?] good to see you. This is not entirely unprecedented. We have seen some other companies like, say, a Robinhood do this. But there is a limited history of this kind of thing. So what effect could it have on the IPO?

BRIANNE LYNCH: Yeah. Thanks for having me. I think that this move really fits into Reddit's whole ethos as a social media platform. They are a platform that really gave a big voice to the retail investor. You have to remember that the whole meme stock frenzy originated with Reddit and their subreddit Wall Street bets in particular. So there is this retail market that is core to their user base.

So it makes sense that they're looking to reward some of those power users with the ability to buy into the IPO. But as you said, this definitely doesn't come with risks. And there are few examples of this. You know, Airbnb is a success story we saw. They allowed marketplace users to buy into the IPO, that IPO traded up 113% in the first day. It was a great win for them.

Uber did the same, and that traded down. Robinhood did the same, and that traded down, is now down 60% since that IPO. And I think there is additional risk just given the social nature of their platform. Are these power users going to be mad if the stock trades down? And what is that going to do for overall stock performance?

When you couple that with the fact that these are not institutional asset managers, who are there to kind of buy and hold and provide some stability to the stock, it makes for an interesting equation. And I'm interested to see what the trading performance is like those first few days.

JOSH LIPTON: And just to broaden out the conversation out a bit, Brianna, I'm interested to get your take, you know, 2023, quiet year for IPOs, as you know. 2024 not off to a great start either. I am interested, Brianne, what you kind of see ahead, you know, puts and takes for the IPO market in 2024.

BRIANNE LYNCH: Yeah. It seems like this year should be better for IPOs and M&A as well. You hear from the heads of both NYSE and NASDAQ that are deep pipelines of companies preparing, bankers have been busy as companies are looking to put their pieces in place and prepare for an IPO. That being said, I think a lot of companies are waiting for one company to go out and have this blockbuster IPO. And then that will encourage others to follow.

Last year, we saw in the fall, Klaviyo, Instacart, Arm, Birkenstock, all these IPOs hit the market. And there was excitement about them. And they had lackluster performance They didn't really provide that boost that the market was looking for.

But that being said, when you look-- you zoom out from a macro perspective, we do have signs of stability. The VIX is at levels it hasn't been at in years. We've seen the markets rally. We have strong job growth. And other indicators would suggest now is a good time. And so I think more companies will start to dip their toes in. But most will wait for that first, hopefully, successful one to hit the market.

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