Faced with growing demand for cash amid a frenetic stock market, Robinhood, the online trading app, said Thursday it has raised more than $ 1 billion from homes. current investment.
Robinhood, one of the largest online brokerage firms, struggled with extremely high trading volumes this week as individual investors flocked to stocks like GameStop. That operation has put strain on Robinhood, which has to pay customers who are owed money from transactions while depositing more money into its clearing facility to isolate its trading partners. from potential losses.
On Thursday, Robinhood was forced to prevent customers from buying some highly traded shares like GameStop this week. To continue operating, it attracted a line of credit from six banks in the amount of $ 500 million to $ 600 million to meet higher margin or lending requirements from the clearing facility. except for the center for stock transactions, called the Depository Trust & Clearing Corporation.
Robinhood still needs quick extra cash to ensure that they don’t have to put additional limits on client transactions, the two briefed on the situation and insisted on anonymity because the negotiations were confidential.
Robinhood, which is privately held, has reached out to some of its investors, including venture capital firms Sequoia Capital and Ribbit Capital, who were together on Thursday night to provide emergency funding. level, said five participants to the negotiation.
Josh Drobnyk, a spokesman for Robinhood, said in an email: “This is a strong sign of trust from investors that will help us continue to serve our customers further. Sequoia and Ribbit declined to comment.
Investors providing new capital source for Robinhood will receive additional equity in the company. Investors will receive that equity at a discounted price tied to the price of Robinhood shares when the company listed, two of them said. Robinhood intends to hold an initial public offering later this year, the two announced briefly about the plan.
Robinhood’s emergency fundraising is the latest sign of how trading the stock market hasn’t been doing this week.
An army of online investors who were on a mission to challenge Wall Street dominance quickly raised the price of stocks like GameStop, enticing large hedge funds to bet on stocks. Some of these individual investors made huge profits, while at least one large hedge fund had to bail out after facing huge losses.
Robinhood, based in Silicon Valley, is key to empowering online investors. Application adoption skyrocketed during the pandemic as the stock market soared and people lost their daily trading in the void of other pastimes. The company has attracted millions of unprecedented young investors by offering free trading and an app that critics say makes buying stocks like an online game.
With no fees, Robinhood makes money by transferring clients’ trades to larger brokers, like Citadel, who pay Robinhood for the opportunity to execute client’s stock 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 according to stock market developments and risk big losses. Brokers including T. Rowe Price, Schwab and Fidelity mimicked Robinhood by lowering their transaction fees to zero. Many of them were also affected by the failed trade this week.
Robinhood had no trouble raising money last year, raising $ 1.3 billion in supporting venture capital and bringing its value to nearly $ 12 billion. Its other investors include venture capital firm DST Capital, New Enterprise Associates, Index Ventures and Andreessen Horowitz.
However, the company faced many problems, including fines from regulators for misleading customers. Last March, they raised more money after their app crashed and left customers stuck and suffering massive losses, leading to an ongoing lawsuit.
In recent weeks, many online investors have used Robinhood to bet on the price push of GameStop, AMC Entertainment and other stocks that have been shorted – or staked against – by hedge funds. That changed on Thursday after the company restricted customer trading on its most popular stocks.
“As a brokerage, we have a lot of financial requirements,” Robinhood said in a blog post Thursday. “Some of these requirements fluctuate based on market volatility and can be substantial in the current environment.”
In protest, hundreds of thousands of users participated in a campaign to give Robinhood the lowest one-star rating and down the company’s ratings. Some investors also sued Robinhood for the losses they suffered after the company cut off certain trades and some lawmakers urged regulators to examine the company more closely.