‍View original article by Fortune featuring Gateway's Cody Slach

Online message board Reddit made an unusual offer to some of its top users in the run up to a planned initial public offering this week. Instead of selling its shares exclusively to big investors, as is typical in IPOs, it also invited some in its army of fervent users to buy in.

With the decision, Reddit joined a small but growing movement by companies to be more democratic in how they allocate their IPO shares. The idea is to reward loyal users and customers by letting them invest in an IPO, if they so choose, alongside the fat cats.

“It’s not very common, but as markets change, the IPO process will evolve,” said Cody Slach, senior managing director of Gateway Group, an investor relations and public relations advisory firm. “The institutional audience has in the past dominated this space, but with the rise of retail investing, it’s hard to ignore that this part of the market is growing and smart and cares.”

Over the last five years, companies that have carried out so-called directed share programs similar to Reddit’s include Uber, which let some of its drivers participate in its IPO. Meanwhile, Airbnb allowed some hosts to buy shares in its IPO, and restaurant chain Cava let its top rewards members in on the deal.

Reddit, whose stock is expected to begin trading on March 21, will extend up to 1.76 million shares, or 8% of the total shares available in the IPO, to its users at the anticipated IPO price of $31 to $34. The amount represents 1% of the company’s total shares. Reddit users, known as Redditors, were able to put in orders for shares on Tuesday before they begin trading publicly.

Whether Redditors will actually purchase the stock, though, is still up in the air. Those who have posted online about the option largely say they aren’t interested. It’s “too risky and volatile as an investment,” said one Redditor with the username @kokoromelody.

Another, @lilabeen, wrote “Reddit is a powerful space for community but [I’m] not sure I believe in the platform’s long term potential in terms of revenue,” citing ad sales as a continued struggle for the company.

The online message board generates nearly all of its revenue from ads, and after 20 years as a business is still unprofitable. Reddit plans to use funds from its IPO to expand its ad operations, but it also acknowledged “a history of net losses” that could foretell continued losses in the future, according to its Securities and Exchange Commission filing. The inability to attract new advertisers, the loss of existing ones, or a reduction in ad spending could hurt the business and impact share price.

Reddit declined to comment.

Other Redditors conceded they may buy shares “just for fun,” as is the case with user @lily-de-valley. That user predicted members of WallStreetBets—a group of Redditors who infamously organized during the pandemic to briefly send the stocks of troubled companies like GameStop soaring—could pump up Reddit’s share price immediately after the IPO.

In addition to offering Redditors the ability to buy IPO shares, Reddit has made its stock information accessible to them where they feel most comfortable. Along with creating the typical investor relations hub on its website, Reddit established a subreddit where it plans to publish news, earnings releases, and information about earnings calls. In the subreddit, any Redditor, regardless of whether they own stock, can ask questions of company executives ahead of earnings calls. The company will also host “AMAs”—or “ask-me-anything” posts, a format Redditors are used to—for the executive team to answer financial questions.

“Reddit is about community,” said Rosebud Nau, capital markets lawyer and partner at Haynes Boone. “There could be concern about if the IPO will change the nature of Reddit and how that could impact the community. Maybe giving people the opportunity to participate helps maintain that community feel.”

The risks and rewards of directed share programs

Companies have typically reserved directed share programs for their executives and board members, sometimes extending them to their family, friends, and employees. Such offers are intended to give employees a stake in the company and to recognize—and potentially reward—important stakeholders. Friends and family of executives, for example, have had this option for more than 20 years.

Offering a directed share program as part of an IPO can be risky for companies, however. In some cases, IPO shares take a beating after starting public trading, which means new shareholders risk losing money right off the bat.

“If the stock price increases and [users are] able to sell for a profit, you’ve rewarded these people who are important to you,” Nau told Fortune. “On the flip side, if the stock price falls, you could generate animosity among those who participated—some of your most loyal customers or users.”

One danger comes from Reddit’s decision to let Redditors who participate in the directed share program sell their shares immediately after the IPO, experts say. Many early investors in a company, including its own executives, are barred from selling their shares for a certain period of time—typically between 30 and 60 days—after an IPO. The practice is intended to protect people who buy shares in the IPO or just after by preventing a sudden deluge of stock sales that could depress the share price.

“Shares being immediately resold to the market increases volatility in Reddit’s stock,” said Taylor Wirth, corporate securities lawyer and partner at Barnes & Thornburg. If there’s a spike in the stock, for example, a large group of Redditors may want to sell their shares to earn a profit rather than holding for the potential of long-term gains. A large sell-off could then make the price fall.

Reddit has “probably run some analyses that even if all 8% [of new shares sold] were to flood the market at once, that they could take countermeasures and control for that,” Nau told Fortune. “Or maybe they decided they’re willing to take that risk because they believe in how the company will do. Even if there’s a short-term drop, they might be looking at more long-term prospects.”

Investor profits on directed share programs have been mixed in recent years. Perhaps the best performing example was Airbnb, which offered shares to some U.S.-based hosts during its IPO in 2020 for $68. The stock immediately began trading at more than double the IPO price, and it is now around $163, thanks to the company’s strong financial performance and high post-pandemic travel demand.

It isn’t always smooth sailing and quick returns, though. Uber, which IPO-ed in 2019, let some drivers buy shares for $45. But the stock opened trading below the IPO price and remained around or below $45 for a year and a half, at times falling as low as $20 due to wide losses and pandemic-related slowdowns. Drivers who held their shares are finally seeing meaningful gains—partly because of a new share buyback program implemented by the company—with shares now at $76.

Those who participated in the directed share program and held their shares for electric vehicle maker Rivian, however, are seeing the opposite happen. Rivian offered shares in its 2021 IPO at $78 to customers who had pre-ordered its electric trucks and SUVs. After the first day of trading, shares closed near $101, and then soared to $179 that next week. But slow production and weak demand for the company’s cars led to sharp declines in the stock, and shares are now worth just $11.

Not all IPO companies offer directed share programs to their users but may rather decide to make some other kind of gesture. DoorDash, which went public in 2020, didn’t offer IPO-priced shares to its delivery drivers, and instead gave them cash bonuses in the months following its public market entrance. When Instacart, another food delivery service, went public last year, it offered IPO shares to some undisclosed individuals selected by management, but not to customers or delivery drivers.

Turo, a car sharing marketplace that is expected to go public later this year, said it will offer IPO-priced shares to some users who rent their personal vehicles through the service, according to its SEC filing.

Whatever the case, Reddit’s IPO would follow a two-year-long drought in newly public tech companies caused by economic uncertainty and the pandemic. Whether the floodgates for IPOs open again could depend on how Reddit’s newly public shares perform.

The fact that Reddit isn’t profitable “scares me a little bit,” said Slach. But if Reddit can show the market it can make money, its stock will be in a good position to rise, and perhaps encourage more companies to try directed share programs for their users and customers, he told Fortune.

“If this thing trades well, others might pay attention to if this directed share program was effective, and maybe it becomes a more standard thing,” Slach said.