Robinhood, the online trading app, announced Thursday that existing investors would raise more than $ 1 billion on a rush.
Robinhood, one of the largest online brokers, has been grappling with extraordinarily high trading volumes this week as individual investors have accumulated in stocks like GameStop. This activity has weighed on Robinhood, which has to pay customers owed money from business while it books additional cash to its clearing facility to protect its trading partners from potential losses.
On Thursday, Robinhood was forced to discourage customers from buying a number of stocks like GameStop, which were trading heavily this week. To continue operations, a line of credit from six banks of $ 500 million to $ 600 million was drawn to meet the higher margin or credit requirements of the central stock clearing facility known as the Depository Trust & Clearing Corporation. to meet.
Robinhood was still in need of more cash quickly to make sure there was no need to restrict customer trading further, said two people, who were briefed on the situation and asked to remain anonymous as the negotiations were confidential.
Robinhood, which is privately held, contacted several of its investors, including venture capital firms Sequoia Capital and Ribbit Capital, who got together on Thursday evening to offer the emergency funding. This was announced by five people involved in the negotiations.
“This is a strong sign of investor confidence that will help us continue to serve our customers,” said Josh Drobnyk, a Robinhood spokesman, in an email. Sequoia and Ribbit declined to comment.
GameStop versus Wall Street
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- Stocks of GameStop, the video game retailer, have risen because amateur investors starting at Reddit have bet heavily on the company’s stock.
- The wave gained momentum when large hedge funds short-sold GameStop stock – essentially betting against the company’s success.
- Sudden demand pushed the stock price from less than $ 20 in December to nearly $ 200 on Thursday. At least on paper.
- It’s not just GameStop. Amateur investors have supported other companies that many large investors have shunned, such as AMC and BlackBerry.
- This bubble around GameStop can force large investors to raise funds to cover their losses or dump stocks in other companies.
Investors refinancing Robinhood will receive additional equity into the company. Investors will receive this equity at a reduced value tied to the price of Robinhood stock when the company goes public, two of those surveyed said. Robinhood plans to go public this year, two people said.
Robinhood’s emergency fundraising is the latest sign of how trading on the stock exchange has been churning this week.
An online army of investors keen to question Wall Street’s dominance quickly offered the price of stocks like GameStop, including the big money hedge funds that had bet against the stocks. Some of these individual investors have made huge profits while at least one large hedge fund has had to be bailed out after huge losses.
Robinhood, based in Silicon Valley, has been key to empowering online investors. The app’s adoption has increased a lot during the pandemic as the stock market soared and people started day trading with no other pastimes. The company has attracted millions of young investors who had never traded before by offering free trading and an app that, according to critics, makes buying stocks seem like an online game.
With no fee, Robinhood makes money by passing its client business to larger brokerage firms like Citadel, who pay Robinhood for the ability to fulfill their client orders.
In May, Robinhood said it had 13 million users. This week, it became the most downloaded free app on Apple’s App Store, according to Apptopia, a data provider.
Critics have accused the company of encouraging people to gamble on stock market movements and risk big losses. Brokers like T. Rowe Price, Schwab, and Fidelity have mimicked Robinhood by lowering their trading fees to zero. Many of them were also affected by trading this week.
Robinhood had no trouble raising cash, raising $ 1.3 billion in venture capital, and raising its valuation to nearly $ 12 billion over the past year. Other investors include venture capital company DST Capital, New Enterprise Associates, Index Ventures and Andreessen Horowitz.
However, the company has faced many problems, including regulatory fines for misleading customers. In March, the company raised more money after its app went down and customers were stranded and suffered huge losses, leading to an ongoing lawsuit.
In the past few weeks, many online investors have used Robinhood to place bets that drove up the price of GameStop, AMC Entertainment, and other stocks that have been largely trimmed or wagered against by hedge funds. That changed Thursday after the company restricted customer trading in the most popular stocks.
“As a brokerage company, we have many financial needs,” Robinhood said in a blog post on Thursday. “Some of these requirements fluctuate due to the volatility of the markets and can be significant in the current environment.”
In protest, hundreds of thousands of users have joined a campaign to give Robinhood’s app the lowest one-star rating and lower the company’s rating. Some investors also sued Robinhood over the losses it suffered after the company stopped trading certain stocks, and several lawmakers urged regulators to investigate the company further.