‘$40 billion’ Robinhood app tries to vault SEC hurdles

It’s some huge cash for a stock-trading app that’s supposedly free.

Robinhood is slated to launch an initial public offering earlier than summer season’s finish that might worth the Silicon Valley-based firm at $40 billion or extra, folks shut to the underwriting group say. That would make it among the many greatest offers of the 12 months — and positively probably the most anticipated because the day-trading app turned a cultural phenom through the pandemic.

A blowout IPO can be comment­in a position for a corporation created solely in 2013 and which has survived its share of controversies. Last summer season, I warned that Robinhood was luring in amateurs caught at dwelling through the COVID lockdowns who took on day buying and selling as a sport. They would ultimately lose their shirts buying and selling shares on its free and easy-to-use platform, and regulators would pounce.

The get together, I predicted, wouldn’t finish effectively and it nearly didn’t. Amateur merchants are the lifeblood of Robinhood and its person progress, they usually misplaced a number of cash on the mistaken aspect of bets. Then got here January’s meme-stock controversy, the place clearing issues stymied buying and selling of some high-volume shares on the app, angering prospects. The firm’s business model got here beneath scrutiny. Congress held hearings in regards to the episode following the wild swings in numerous shares that traded over the platform, and the IPO that was deliberate for March was pushed off ­indefinitely.

But for all of the noise, the shoppers simply stored coming — and the IPO is again on. The purpose is straightforward, firm execs inform me: Robinhood is printing cash. Despite the hiccups, Robinhood added some 6 million extra new customers for its crypto platform alone within the first two months of the 12 months.

Now the app’s explosive person progress has traders clamoring for a chunk of the motion, folks shut to the deal say. And thoughts you, underwriters and firm officers are quietly calculating their $40 billion valuation for a product that founder Vlad Tenev primarily conjured up in his dorm room.

So what may screw it up? The Fed has signaled it gained’t raise interest rates for the foreseeable future, which ought to preserve shares enticing to traders. And with the Fed still printing money and the pandemic receding, the financial system will doubtless continue to grow, lessening worries a couple of market bubble. All of that’s good for inventory costs and bitcoin — which, like different cryptocurrencies, is gasoline for Robinhood’s progress engine.

There is, nevertheless, one potential roadblock to the deal that bankers are quietly discussing behind the scenes: a Securities and Exchange Commission that both blocks the IPO or ­forces the corporate to disclose a lot details about its enterprise mannequin that traders stroll away.

Securities and Exchange Commission Chairman Gary Gensler has brought up concerns of apps such as Robinhood “gamifying” trading.
SEC Chairman Gary Gensler has introduced up considerations of apps similar to Robinhood “gamifying” buying and selling.
AP Photo/Evan Vucci

Gary Gensler, the SEC chairman, hinted at a current congressional listening to how the fee may make the IPO troublesome by taking goal on the numerous methods Robinhood makes cash. “Some academic studies suggest more active trading or even day trading results in lower returns for the average trader,” he said. Translation: Get prepared for doable regulation or enforcement actions that make day buying and selling harder.

Robinhood makes massive bundles of money by promoting buyer orders to brokers so it might probably promote “no commissions” on trades. On Wall Street, the apply is called “payment for order flow,” however Gensler questioned if “broker-dealers have inherent conflicts of interest . . . to encourage customers to trade more frequently than is in those customers’ best interest.”

One individual shut to the corporate assures me that Robinhood’s attorneys and bankers will mitigate any of the SEC’s considerations, and the IPO will occur inside a “couple of months.” Bankers embrace Goldman Sachs and JPMorgan. Shares will doubtless be listed on the Nasdaq, which focuses on tech IPOs.

In March, Robinhood confidentially filed an IPO prospectus, generally known as its S-1, so it might probably get the fee snug with its disclosures. So far, executives have obtained no main pushback, together with on the payment-for-order-flow subject, folks shut to the corporate say.

They additionally remind me that the agency has made strides in cleansing up its picture as a playing den. Its Web web site now shows extra PSA-type disclaimers about the advantages of long-term investing. And to deal with Gensler’s considerations about “gamifying” trading, there aren’t any extra digital confetti showers in your display screen after you purchase a inventory.

Tenev, in the meantime, has begun a marketing campaign to present how new tech may make trades settle immediately ­as a substitute of the two-day lag interval. Known as T+2, the lag beneath regular circumstances is a bump-free, back-end characteristic of the clearing course of. But it helped spur conspiracy theories when it compelled Robinhood to halt an awesome frenzy of unstable trades on GameStop and different red-hot “meme stocks” in late January. The lag additionally helped spur a liquidity disaster that compelled Robinhood to increase greater than $3 billion in money over a ­interval of days.

Whether all of that is sufficient for the SEC is anybody’s guess. Personally, I discover it troublesome to imagine even an ­aggressive regulator like Gensler — who solutions to each President Biden and business-hating US Sen. Elizabeth Warren — will put the brakes on capital formation and kill a deal. All these years Gensler spent as a banker at Goldman Sachs have to be value one thing.

That doesn’t imply the SEC chief and his commissars gained’t make life troublesome for Tenev & Co., forcing Robinhood and its bankers to disclose each doable regulatory obstacle to progress that may come. If so, they could have to kiss that $40 billion ­valuation goodbye.

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