Robinhood’s Guinea Pig for Upending Public Offerings: Itself

SAN FRANCISCO – When Vlad Tenev and Baiju Bhatt developed the Robinhood stock trading app in 2013, entrepreneurs said their mission was to democratize Wall Street and make finance accessible to all. Now as they prepare to get their company public, they are taking that ethos to a new extreme.

Mr. Tenev and Mr. Bhatt have long debated how Robinhood’s IPO would be more open than any other offering that came before it, said three people close to the company. This week, the two founders laid out the details: Robinhood plans to sell up to a third of its offering, or $ 770 million stock, directly to customers through its app. The company added that anyone can attend a special livestream of their investor presentations this Saturday.

The moves are highly unusual and turn the traditional IPO on its head. No company started out offering so many stocks for everyday investors; Firms typically only reserve 1 or 2 percent of their shares for customers. And investor presentations usually take place behind closed doors at Wall Street firms, which have long had the most access to public offerings.

But Mr Tenev and Mr Bhatt have been making plans to change the way IPOs are conducted since at least 2019, said a person familiar with the company who was not authorized to speak publicly. Robinhood also chose Goldman Sachs to lead its offering, in part because of the bank’s ability to sell pre-IPO stocks – normally reserved for professionally managed funds – to thousands of everyday investors through the Robinhood app, one said other person involved in the offer.

“We understand that for many of you this will be the first public offering you can participate in,” wrote Mr. Tenev, 34, and Mr. Bhatt, 36, in Robinhood’s prospectus. They wanted to put customers “on an equal footing” with large institutional investors.

However, the risks of going public are significant. Robinhood faces the technical challenges of handling the orders for pre-IPO shares from numerous investors smoothly and correctly. And while large professional funds tend to hold onto stocks they buy in an IPO, there is little stopping ordinary investors from selling Robinhood stock right away.

Robinhood also lets its employees sell up to 15 percent of their shares immediately after listing, rather than having to wait the traditional six months. That could contribute to volatile trading.

The company’s app includes an industry standard “flipping” warning of stocks within 30 days that could discourage Fins from buying into future IPOs. Robinhood’s bankers also expect early trading to be more volatile than other deals, said one person involved in the process.

If successful, the offer will validate Mr. Tenev and Mr. Bhatt’s mission and potentially change the way hot companies go public. It could also help Robinhood polish its reputation after a rocky year of tech outages, user protests, lawsuits, regulatory reviews, and fines.

“The company is taking enormous risk,” said RA Farrokhnia, professor of business administration at Columbia Business School. “If it works, it will be a fantastic win. If things don’t go well, it’s a black spot. “

Robinhood declined to make its executives available for interviews, referring to the quiet time rules prior to listing. Having initially valued its shares at $ 38 to $ 42, which equates to a valuation of about $ 35 billion, Robinhood is expected to set a final price next Wednesday and begin trading a day later.

Companies and their advisors have been reluctant to sell a large portion of their IPO stock to retail investors. Any technical issues could result in regulatory reviews and investor lawsuits, bankers said.

In 2006, the telephone service provider Vonage tried to sell shares to its customers when it went public. However, a technical glitch didn’t leave buyers unclear whether their deals were closed until days later when the stock collapsed. Customers sued Vonage, and regulators fined the banks that carried out the offer.

BATS Global Markets, an exchange, attempted to go public on its own exchange in 2012 but had “technical issues” the day of its offering and had to pull the deal. Facebook’s debut in 2012 was classified as a “flop” after similar glitches in a new trading system.

Still, Mr. Tenev and Mr. Bhatt viewed a more open public offering as the core of Robinhood’s ethos. Their app has drawn millions of new investors into the world of stock trading, and the company has consistently pushed boundaries with new products and has often gotten into hot water with regulators.

That year, Robinhood launched IPO Access, a product that enables companies to sell stocks directly to customers before going public. This way, people can make money on the “pop” of stock price that often occurs on a company’s first day of trading.

One company that Robinhood contacted earlier this year to distribute a portion of its public offering to ordinary investors was Figs, a medical scrubs company, CEO Heather Hasson said. Figs eventually made 1 percent of its offer to retail investors to “empower” the healthcare providers who buy its clothing, Ms. Hasson said.

“Our community is our brand and our brand is our community,” she said.

But even with such a low allocation, banks like Goldman Sachs were concerned about potential technical issues and retail investor injuries, said a person familiar with the offer. It was the first time the Robinhood app put on such a deal. Feigen shares have risen nearly 30 percent since they were offered in May.

Robinhood’s offering is unlikely to be easy to emulate, given that the company is unique in its size and notoriety among retail investors – and is dedicated to promoting retail, said Josh Bonnie, who drives capital markets at the law firm Simpson Thacher & Bartlett directs.

“I think they are set up differently than most companies going public,” he said.

Robinhood’s debut may have added unpredictability as its clients have shown that they are ready to band together on social media to tackle supposed enemies. The company alienated some of them when it ceased trading during the January “meme stocks” rally, when traders congregating on the Reddit platform took stocks of certain companies like GameStop on a roller coaster ride.

Investors who lost money during the trading freeze have been outraged – including Muhammad Hamza, a recent college graduate in Queens. He’d joined Robinhood in November and watched his investments in penny stocks and meme stocks skyrocket, then plummet by about half during the January stop. He said he felt betrayed.

“I don’t know how to get over it,” said Mr. Hamza, 22 years old. He now uses WeBull, a competing service, and has no plans to buy into Robinhood’s initial public offering. Instead, he said he was considering short selling Robinhood stock or placing a bet that the price will go down after it goes public.

His friends in online communities are planning similar moves, he said, though some can’t get out of the easy-to-use app. Despite the backlash, Robinhood added five million users last year and quadrupled its quarterly revenue.

“A lot of people are against Robinhood,” said Hamza, “but they still use Robinhood.”

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