Robinhood IPO filing: Trading app reveals fast growth amid scrutiny

2 Jul 2021

Image: © wachiwit/Stock.adobe.com

Here’s what we learned from the controversial trading app’s filing to go public.

A day after being hit with a record fine from a US financial regulator, Robinhood filed for its highly anticipated IPO.

With this move, the fast-growing but controversial trading app revealed a window into its finances and the potential challenges ahead.

Robinhood was profitable last year, with income of $7.5m on net revenue of $959m, according to its filing with the US Securities and Exchange Commission.

It revealed that the number of funded accounts on its platform rose to 18m in March this year, up from 7.2m in 2020. Meanwhile, its assets under custody have sharply risen from $19.2m last March to $80bn this year.

What is Robinhood?

California-headquartered Robinhood was founded in 2013 and has made its name offering commission-free trading of stocks through its mobile app, with equity, cryptocurrency and options trading.

The app then makes its money from selling order information to high-frequency traders, margin lending and a premium paid service.

The company says that its aim is to make investing accessible to everyone, and its no-fee, gamified approach has attracted millions of users including many young and first-time investors.

But its business model has also attracted plenty of scrutiny.

Earlier this week, it was ordered to pay nearly $70m in penalties by the US Financial Industry Regulatory Authority. In the organisation’s largest financial penalty ever, it fined Robinhood $57m and ordered it to pay $12.6m in restitution to thousands of clients.

These sanctions related to technical failures experience by the app last year, a lack of due diligence before approving customers to place options trades, and giving “false or misleading information” to customers.

It has also recently faced scrutiny from the Securities and Exchange Commission and Massachusetts regulators for misleading and manipulating users.

Robinhood also came under fire for its role in the GameStop trading saga earlier this year. It faced criticism from users after imposing restrictions on trading at the height of the retail investor frenzy in January, after which company CEO Vladimir Tenev was grilled in a congressional hearing.

What else did we learn from the IPO filing?

Robinhood plans to list its shares on the Nasdaq stock exchange and hopes to raise $100m by going public.

It also plans to include its own customers in the IPO. The company said it will set aside as much as 35pc of shares for retail investors on its trading platform.

But Robinhood also outlined several risk factors in its IPO prospectus.

It said that the majority of its revenue is transaction-based, including the controversial practice known as payment for order flow, or PFOF.

“Reduced spreads in securities pricing, reduced levels of trading activity generally, changes in our business relationships with market makers and any new regulation of, or any bans on, PFOF and similar practices may result in reduced profitability, increased compliance costs and expanded potential for negative publicity,” the company said in its filing.

It also revealed that it reached an out-of-court settlement with the family of a 20-year-old user who died by suicide last year after he mistakenly believed he had racked up big losses on the trading app. The family sued Robinhood, accusing the company of “wrongful death, negligent infliction of emotional distress and unfair business practices”.

“We have grown rapidly in recent years and we have limited operating experience at our current scale of operations,” Robinhood said in the risk factors section of its prospectus.

“If we are unable to manage our growth effectively, our financial performance may suffer and our brand and company culture may be harmed.”

But whatever the outcome of the upcoming IPO, it will likely be closely watched by investors – both those on Wall Street and those at home with a mobile app.

Sarah Harford is sub-editor of Silicon Republic

editorial@siliconrepublic.com