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SAN FRANCISCO – When Vlad Tenev and Baiju Bhatt created the Robinhood scholarship app in 2013, entrepreneurs declared their mission to democratize Wall Street and make finance accessible to everyone. Now, as they prepare to go public, they are taking this philosophy to a new extreme.
Mr Tenev and Mr Bhatt have long discussed how Robinhood’s initial public offering would be more open than any previous offering, three people close to the company said. This week, the two founders gave the details: Robinhood plans to sell up to a third of its offering, or $ 770 million in stock, directly to customers through its app. The company added that anyone can participate in a special livestream of its investor presentations this Saturday.
The moves are very unusual and disrupt the traditional IPO process. No company has ever offered so many shares to common investors to begin with; companies generally reserve only 1 or 2 percent of their shares for their customers. And investor presentations typically take place behind closed doors with Wall Street companies, 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 IPOs are done, said a person familiar with the company who was not authorized to speak in public. Robinhood also chose Goldman Sachs to lead its offering in part due to the bank’s ability to help sell pre-IPO stocks – normally reserved for professionally managed funds – to thousands of investors daily on the app. Robinhood, said another person involved in the offering.
“We recognize that for many of you, this will be the first IPO you get the chance to participate in,” Mr. Tenev, 34, and Mr. Bhatt, 36, wrote in the prospectus of Robinhood offer. They added that they wanted to put clients on an “equal footing” with large institutional investors.
But the risks of opening an IPO are significant. Robinhood faces the technical challenges of ensuring that pre-IPO stock orders are processed smoothly and correctly with many investors. And while large professional funds tend to hold onto the stocks they buy on an IPO, there isn’t much to stop ordinary investors from immediately getting rid of Robinhood stocks.
Robinhood also allows its employees to sell up to 15% of their shares immediately after listing, rather than making them wait the traditional six months. This could add to the volatility of trading.
The company’s app includes an industry standard warning against stock “flipping” within 30 days, saying it could prevent pinball machines from buying into future IPOs.
If the offer is successful, it will validate Mr. Tenev and Mr. Bhatt’s mission and potentially transform the way top companies go public. It could also help Robinhood build its reputation after a difficult year of technical failures, user protests, lawsuits, regulatory oversight and fines.
“The business is taking a huge risk,” said RA Farrokhnia, professor of business economics at Columbia Business School. “If it works, it will be a fantastic victory. If it goes wrong, it will be a black spot.
Robinhood has refused to make its leaders available for interviews, citing the rules of the period of silence before its registration. After initially valuing his shares at between $ 38 and $ 42 each, bringing Robinhood’s valuation to around $ 35 billion, he is expected to set a final price next Wednesday and start trading a day later.
Companies and their advisers have been cautious about selling a large portion of their IPO shares to retail investors. Any technical glitches could lead to regulatory scrutiny and legal action by investors, the bankers said.
In 2006, telephone service provider Vonage attempted to sell shares to its customers when it went public. Customers sued Vonage and regulators fined the banks that managed the offer.
BATS Global Markets, a stock exchange, attempted to go public on its own stock exchange in 2012, but encountered “technical issues” on the day it was offered and had to withdraw the deal. Facebook’s debut in 2012 was seen as a “flop” after similar problems in a new trading system.
Nonetheless, Mr. Tenev and Mr. Bhatt considered that a more open IPO was at the heart of Robinhood’s philosophy. Their app has drawn millions of new investors to the stock trading world, and the company has repeatedly pushed the boundaries with new products, often finding itself in hot water with regulators.
This year, Robinhood introduced IPO Access, a product that allows publicly traded companies to sell pre-IPO stocks directly to clients. This way people can make money on the stock price “pop” which often occurs on a company’s first day of trading.
One company Robinhood approached this year to allocate part of its public offering to mainstream investors was Figs, a medical scrubs company, its chief executive, Heather Hasson, said. Figs ultimately provided 1% of its offering to retail investors to “empower” healthcare providers who buy its clothes, Ms. Hasson said.
“Our community is our brand, and our brand is our community,” she said.
But even with such a small allocation, banks such as Goldman Sachs were concerned about potential technical issues and retail investors, a person with knowledge of the offer said. This was the first time that Robinhood’s app hosted such a deal. The fig stock has risen nearly 30% since its supply in May.
Robinhood’s offering is unlikely to be easily emulated because the company is unique in size and notoriety with retail investors – and its business is promoting retail, said Josh Bonnie, who helps lead. capital markets at the law firm Simpson Thacher & Bartlett.
“I think they are located differently from most companies pursuing IPOs,” he said.
Robinhood’s early days may have an added layer of unpredictability, as its clients have shown they are willing to unite on social media to combat perceived enemies. The company alienated some of them when it halted trading during the January ‘meme stocks’ rally, when traders who rallied on the Reddit platform sent in the shares of some companies as GameStop on a roller coaster.
Investors who lost money during the trading halt were furious, including Muhammad Hamza, a recent college graduate from Queens. He had joined Robinhood in November and had seen his investments in penny stocks and even stocks soar, then plunge by about half during the January shutdown. He said he felt betrayed.
“I don’t know how to overcome this,” said Mr. Hamza, 22. He now uses WeBull, a competing service, and has no plans to buy into the Robinhood IPO. Instead, he said he was considering short selling Robinhood shares or betting that the price will drop after it is listed.
His friends in online communities are planning similar moves, he said, although some may not be able to leave the easy-to-use app. Despite the backlash, Robinhood added five million users in the past year and quadrupled its quarterly revenue.
“A lot of people are anti-Robinhood,” Mr. Hamza said, “but they still use Robinhood.”
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