As Its IPO Approaches, Reddit Cites Content Moderation and Meme Stock Resurgence as Risks

The front page of the internet is preparing to go public. Reddit, the user-moderated chat room founded in 2005 that ballooned into a sprawling hub of conversation and community, filed its prospectus for an initial public offering (IPO) with the Securities and Exchange Commission on Thursday. 

In its Form S-1, Reddit reported losses of $91 million last year on revenue of $804 million, up 21 percent from $666.7 million in 2022. The company’s targeted valuation is unclear, but earlier reports indicate it will be in the range of $5 billion. That would be a significant tumble from its 2021 valuation of $10 billion, which was cut by 41 percent in 2023, after Fidelity, a major investor, downgraded its equity stake in the company. 

Curiously, Reddit’s prospectus names a recurring theme as a potential liability when the firm enters the public market: Its own users. Redditors created the “meme stock” craze of 2021, when members of the Subreddit r/WallStreetBets pumped up the share prices of GameStop and AMC, companies deemed to have declining prospects. But Redditors defied the odds against institutional investors and upended–if only temporarily–the traditional dynamics of Wall Street. 

“The rapid and substantial increases or decreases in the market prices of ‘meme’ stocks may be unrelated to the respective issuer’s operating performance,” the prospectus says, indicating that Redditors could artificially inflate a stock’s value, despite a company’s real-life challenges. 

The company also warns that r/WallStreetBets aficionados could very well target Reddit itself. 

“Given the broad awareness and brand recognition of Reddit, including as a result of the popularity of r/WallStreetBets among retail investors, and the direct access by retail investors to broadly available trading platforms, the market price and trading volume of our Class A common stock could experience extreme volatility for reasons unrelated to our underlying business,” the company notes.

Additional risks flagged for investors include the company’s inability to stamp out misleading, offensive, and derogatory content. Reddit’s content moderation duties have long fallen on volunteer users, who act as Subreddits’ volunteer police force. This could be a risk, according to the filing, which states: “Between our rules and the rules devised by our communities, we may not be able to adequately anticipate and cover every situation where offensive, inappropriate, hostile, or otherwise objectionable content may arise.”

Conflicts between Reddit’s daily usership–which reached 73.1 million last year according to the filing–and its leadership have been a major struggle as it prepares to go public. Last year, major Subreddits were taken offline by users in a protest against the company’s plan to charge third-party apps for access to its application programming interface. Third-party apps such as Reddit Is Fun and Apollo offered superior user experiences and didn’t serve ads, which leadership viewed as a detriment to the bottom line. 

But Reddit recently announced another revenue stream: a $60 million partnership with Google that will allow the search giant to trawl Reddit’s content and use it to train its AI models. That, along with advertising and a growing network of e-commerce on the site, are the reasons Reddit hopes it can win over investors. CEO Steve Huffman, for his part, is certainly banking on Reddit playing an integral part in training large language models. 

“We expect our data advantage and intellectual property to continue to be a key element in the training of future LLMs,” he wrote in the prospectus’ introduction. 

The company also cites an “entrepreneurial user economy” in which Redditors exchange services–such as Photoshop jobs–for payment: “We believe these initiatives will open additional monetization channels for us.”