SAN FRANCISCO – When Vlad Tenev and Baiju Bhatt created the stock trading app Robinhood in 2013, the entrepreneurs proclaimed their mission to democratize Wall Street and make finance accessible to the public. everybody. Now as they prepare to go public with their company, they are taking that ethos to a new extreme.
Mr. Tenev and Mr. Bhatt have long discussed how Robinhood’s initial public offering would be more open-minded than any previous offering, three people close to the company said. This week, the two founders detailed: Robinhood plans to sell up to a third of the shares on offer, or $770 million in shares, directly to customers through its app. The company added that anyone can participate in a special live stream of its investor pitches this Saturday.
These moves are highly unusual and change the traditional IPO process. No company has ever offered so many shares to everyday investors in the first place; companies usually only give 1 or 2 percent of their shares to customers. And investor presentations often take place behind closed doors with Wall Street firms, which have long had the most access to public offerings.
But Mr. Tenev and Mr. Bhatt have been planning since at least 2019 to change the way the IPO is done, said a person familiar with the company who is not authorized to speak publicly. Robinhood also chose Goldman Sachs to lead its offering in part because of the bank’s ability to help sell pre-IPO shares – usually reserved for professionally managed funds – to thousands of investors daily on the app. by Robinhood, said another person involved in the offering.
“We recognize that for many people this will be the first IPO you have the opportunity to participate in,” Tenev, 34, and Bhatt, 36, wrote in Robinhood’s offering prospectus. They added that they want to place clients on an “equal basis” with large institutional investors.
But the risk of opening an IPO is huge. Robinhood faced technical challenges in ensuring that pre-IPO stock orders were processed smoothly and accurately with a wide range of investors. And while the big professional funds tend to keep the stock they buy during the IPO, there’s little to stop everyday investors from dumping Robinhood’s stock right away.
Robinhood is also allowing its employees to sell up to 15% of their shares immediately after listing, instead of letting them wait six months as has been the tradition. That can add to trading volatility.
The company’s application includes an industry-standard warning against 30-day stock flips, saying it could discourage buying into future IPOs Robinhood bankers also expect early trading to be more volatile than other services, said one person involved in the process.
If the offering is successful, it will validate Mr. Tenev and Mr. Bhatt’s mission, and potentially change the way companies go public. It could also help Robinhood polish its reputation after a tumultuous year of technical problems, user protests, lawsuits, regulatory scrutiny and fines.
“The company is taking huge risks,” said RA Farrokhnia, a professor of business economics at Columbia Business School. “If it works, it will be a great win. If it goes badly, it will be a black spot.”
Robinhood declined to provide interviews to its executives, citing pre-listing silence time rules. After initially valuing its shares at $38 to $42 per share, putting Robinhood’s value at around $35 billion, it is expected to set a final price next Wednesday and begin trade a day later.
The companies and their advisors have been cautious about selling a large portion of their IPO shares to retail investors. Bankers said any technical problems could lead to regulatory scrutiny and investor lawsuits.
In 2006, phone service provider Vonage tried to sell shares to customers during its IPO, but a technical glitch left buyers unclear whether their transaction would take place until the next few days. days later, when the stock plummeted. Customers sued Vonage and regulators fined the banks that made the offering.
BATS Global Markets, a stock exchange, attempted to list on its own exchange in 2012 but encountered “technical problems” on the day of the offering and had to withdraw the deal. Facebook’s 2012 launch was deemed a “failure” after similar glitches in the new trading system.
However, Mr. Tenev and Mr. Bhatt see the more open IPO as core to Robinhood’s ethos. Their app has attracted millions of new investors to the world of stock trading, and the company has repeatedly pushed boundaries with new products, often getting into trouble with regulators.
This year, Robinhood introduced IPO Access, a product that allows public companies to sell pre-IPO stock directly to customers. That way, people can cash in on the “pop” stock prices that usually occur on the company’s first trading day.
CEO Heather Hasson said one company Robinhood approached this year to allocate a portion of its public offering to investors daily was Figs, a medical scrub company. Ms Hasson said Figs ended up providing 1% of the offering to retail investors to “empower” healthcare providers to buy its clothing.
“Our community is our brand, and our brand is our community,” she said.
But even with such a small allocation, banks like Goldman Sachs are concerned about potential technical problems and hurt retail investors, said one person with knowledge of the offering. said. This is the first time Robinhood’s app has hosted such a deal. Figs stock is up nearly 30% since its offering in May.
Josh Bonnie, who helps lead capital markets at law firm Simpson Thacher & Bartlett, said Robinhood’s offering is difficult to easily imitate because the company has a unique size and perception among investors. retail – and is in the business of promoting the retail business.
“I think they are positioned differently than most companies pursuing an IPO,” he said.
Robinhood’s launch could add an extra layer of uncertainty as its customers have shown they’re willing to band together on social media to fight well-known adversaries. The company shunned some of them when it halted trading during the “meme stock” rally in January, when traders gathered on the Reddit platform sent shares of certain companies like GameStop on a roller coaster ride.
Investors who lost money during the trading pause were furious – including Muhammad Hamza, a recent college graduate in Queens. He joined Robinhood in November and watched his investments in penny stocks and meme stocks skyrocket, then halve during the January pause. He said he felt betrayed.
“I don’t know how to get over that,” said 22-year-old Hamza. He’s currently using WeBull, a competing service, and has no plans to buy into the Robinhood IPO. Instead, he says he’s considering shorting Robinhood stock or betting that the price will drop later when it is listed.
He says his friends on online communities are plotting similar moves, though some can’t leave 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 Mr. Hamza, “but they still use Robinhood.”