Robinhood’s Guinea Pig for Upending Public Offerings: Itself

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SAN FRANCISCO — When Vlad Tenev and Baiju Bhatt created the stock trading app Robinhood in 2013, the entrepreneurs declared that their mission was to democratize Wall Street and make finance accessible to all. Now as they prepare to make their company public, 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 than any other offering that came before it, three people close to the company said. This week, the two founders laid out the details: Robinhood plans to sell as much as a third of its offering, or $770 million of shares, 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 highly unusual and upend the traditional I.P.O. process. No company has ever offered so many shares to everyday investors at the outset; firms typically reserve just 1 or 2 percent of their shares for customers. And investor presentations usually 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 made plans since at least 2019 to change the way I.P.O.s are done, said a person familiar with the company who was not authorized to speak publicly. Robinhood also chose Goldman Sachs to lead its offering partly because of the bank’s ability to help sell pre-I.P.O. shares — normally reserved for professionally managed funds — to thousands of everyday investors on Robinhood’s app, another person involved in the offering said.

“We recognize that for many of you this will be the first I.P.O. you have had a chance to participate in,” Mr. Tenev, 34, and Mr. Bhatt, 36, wrote in Robinhood’s offering prospectus. They added that they wanted to put customers on an “equal footing” with large institutional investors.

But the risks of opening up an I.P.O. are significant. Robinhood faces the technical challenges of ensuring that orders for pre-I.P.O. shares are processed smoothly and correctly with numerous investors. And while big professional funds tend to hold on to stock that they buy in an I.P.O., there is little to stop everyday investors from immediately dumping Robinhood’s shares.

Robinhood is also letting its employees sell up to 15 percent of their shares immediately upon its listing, rather than having them wait the traditional six months. That could add to volatile trading.

The company’s app includes a standard industry warning against “flipping” shares within 30 days, saying it could bar flippers from buying into future I.P.O.s. Robinhood’s bankers also expect early trading to be more volatile than other offerings, a person involved in the process said.

If the offering is a success, it will validate Mr. Tenev and Mr. Bhatt’s mission and potentially transform the way hot companies go public. It could also help Robinhood burnish its reputation after a rocky year of technical outages, user protests, lawsuits, regulatory scrutiny and fines.

“The company is taking a huge risk,” said R.A. Farrokhnia, a business economics professor at Columbia Business School. “If it works, it’s going to be a fantastic win. If it goes badly, it will be a black mark.”

Robinhood declined to make its executives available for interviews, citing the quiet-period rules before its listing. After initially pricing its shares at $38 to $42 each, which put Robinhood’s valuation at about $35 billion, it 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 huge portion of their I.P.O. shares to retail investors. Any technical problems could invite regulatory scrutiny and investor lawsuits, bankers said.

In 2006, the phone service provider Vonage tried to sell shares to its customers in its I.P.O. But a technical glitch left buyers unclear whether their trades had gone through until days later, when the stock had plummeted. Customers sued Vonage, and regulators fined the banks that ran the offering.

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

Still, Mr. Tenev and Mr. Bhatt viewed a more open I.P.O. as core to Robinhood’s ethos. Their app has drawn millions of new investors to the world of stock trading, and the company has repeatedly pushed boundaries with new products, frequently winding up in hot water with regulators.

This year, Robinhood introduced I.P.O. Access, a product that allows companies going public to sell pre-I.P.O. shares directly to customers. That way, people can make money on the stock price “pop” that often happens on a company’s first day of trading.

One company that Robinhood approached this year about allocating part of its public offering to everyday investors was Figs, a medical scrubs company, said its chief executive, Heather Hasson. Figs ultimately provided 1 percent of its offering to retail investors to “empower” the health care providers that buy its apparel, 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 getting hurt, a person with knowledge of the offering said. It was the first time Robinhood’s app had hosted such a deal. Figs stock has risen nearly 30 percent since its offering in May.

Robinhood’s offering is unlikely to be easily emulated because the company is unique in its size and awareness among retail investors — and is in the business of promoting retail trading, said Josh Bonnie, who helps lead capital markets at the law firm Simpson Thacher & Bartlett.

“I think they are differently situated than most companies pursuing I.P.O.s,” he said.

Robinhood’s debut may have an added layer of unpredictability because its customers have shown they are willing to band together on social media to fight perceived enemies. The company alienated some of them when it halted trading during January’s “meme stock” rally, when traders who gathered on the Reddit platform sent stocks of certain companies like GameStop on a roller-coaster ride.

Investors who lost money during the trading halt were incensed — including Muhammad Hamza, a recent college graduate in Queens. He had joined Robinhood in November and watched his investments in penny stocks and meme stocks balloon, then plunge by around half during the halt in January. He said he felt betrayed.

“I don’t know how to get over that,” Mr. Hamza, 22, said. He now uses WeBull, a competing service, and does not plan to buy into Robinhood’s I.P.O. Instead, he said he was considering shorting Robinhood stock, or making a bet that the price will decline, after it listed.

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

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