SAN FRANCISCO – When Vlad Tenev and Baiju Bhatt created that Robinhood stock trading app In 2013, the entrepreneurs declared their mission was to democratize Wall Street and make finance accessible to all. Now as they prepare to get 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 offer that came before, said three people close to the company. This week, the two founders laid out the details: Robinhood plans to sell up to a third of its offering, or $ 770 million stock, directly to customers through its app. The company added that anyone can attend a special livestream of their investor presentations this Saturday.
The moves are highly unusual and turn the traditional IPO on its head. No company initially offered so many stocks to ordinary investors; Firms typically only reserve 1 or 2 percent of their shares for customers. And investor presentations usually take place behind closed doors at Wall Street firms, which have long had the most access to public offerings.
But Mr Tenev and Mr Bhatt have been making plans to change the way IPOs are conducted since at least 2019, said a person familiar with the company who was not empowered to speak publicly. Robinhood also selected Goldman Sachs to lead its offering, in part because of the bank’s ability to sell pre-IPO stocks – normally reserved for professionally managed funds – to thousands of everyday investors through the Robinhood app, another said Person involved in the offer.
“We understand that for many of you this will be the first public offering you can participate in,” wrote Mr. Tenev, 34, and Mr. Bhatt, 36, on Robinhood’s Offer prospectus. They wanted to put customers “on an equal footing” with large institutional investors.
However, the risks of going public are significant. Robinhood faces the technical challenges of handling the orders for pre-IPO shares from numerous investors smoothly and correctly. And while large professional funds tend to hold onto stocks they buy in an IPO, there’s little stopping ordinary investors from selling Robinhood stock right away.
Robinhood also lets its employees sell up to 15 percent of their shares immediately after listing, rather than having to wait the traditional six months. That could contribute to volatile trading.
The company’s app includes an industry standard warning of “flipping” stocks within 30 days, which could discourage Fins from buying into future IPOs. Robinhood’s bankers also expect early trading to be more volatile than other deals, said one person involved in the process.
If successful, the offer will validate Mr. Tenev and Mr. Bhatt’s mission and potentially change the way hot companies go public. It could also help Robinhood build its reputation after a rocky year of technical failures, user protests, lawsuits, regulatory review and fines.
“The company is taking enormous risk,” said RA Farrokhnia, professor of business administration at Columbia Business School. “If it works, it will be a fantastic win. If things go bad, it’s a black spot. “
Robinhood declined to make its executives available for interviews, referring to the quiet time rules prior to listing. After the initial pricing of its shares at $ 38 to $ 42 each, which is valued at about $ 35 billion by Robinhood, is expected to set a final price next Wednesday and begin trading a day later.
Companies and their advisors have been reluctant to sell a large portion of their IPO stock to retail investors. Any technical issues could lead to regulatory reviews and investor lawsuits, bankers said.
In 2006, the telephone service provider Vonage tried to sell shares to its customers when it went public. However, a technical glitch didn’t leave buyers unclear whether their deals were closed until days later when the stock collapsed. Customers sued Vonage and regulators fined the banks that carried out the offer.
Still, Mr. Tenev and Mr. Bhatt viewed a more open public offering as the core of Robinhood’s ethos. Your app has attracted millions of new investors the world of day trading, and the company kept pushing boundaries with new products and often got into hot water with controls.
That year, Robinhood launched IPO Access, a product that enables companies to sell stocks directly to customers before going public. This way, people can make money on the “pop” of stock price, which often occurs on a company’s first day of trading.
One company that Robinhood contacted earlier this year to distribute a portion of its public offering to ordinary investors was Figs, a medical scrubs company, CEO Heather Hasson said. Figs ended up making 1 percent of its offer to retail investors to “empower” the healthcare providers who buy its clothing, Ms. Hasson said.
“Our community is our brand and our brand is our community,” she said.
But even with such a low allocation, banks like Goldman Sachs were concerned about potential technical issues and retail investor injuries, said a person familiar with the offer. It was the first time the Robinhood app put on such a deal. Feigen shares have risen nearly 30 percent since they were offered in May.
Robinhood’s offering is unlikely to be easy to emulate, given that the company is unique in its size and notoriety with retail investors – and is dedicated to promoting retail, said Josh Bonnie, who drives capital markets at the law firm Simpson Thacher & Bartlett directs.
“I think they are set up differently than most companies going public,” he said.
Robinhood’s debut can have an added unpredictability as its clients have shown they are ready to band together on social media to tackle supposed enemies. The company alienated some of them when it ceased trading during the January “meme stocks” rally, when traders congregating on the Reddit platform took stocks of certain companies like GameStop on a roller coaster ride.
Investors who lost money during the trading freeze were outraged – including Muhammad Hamza, a recent college graduate in Queens. He’d joined Robinhood in November and watched his investments in penny stocks and meme stocks skyrocket, then plummet by about half during the January stop. He said he felt betrayed.
“I don’t know how to get over it,” said Mr. Hamza, 22 years old. He now uses WeBull, a competing service, and has no plans to buy into Robinhood’s initial public offering. Instead, he said he was considering shorting Robinhood stock or placing a bet that the price will go down after it goes public.
His friends in online communities are planning similar moves, he said, although some can’t get out of the easy-to-use app. Despite the backlash, Robinhood added five million users last year and quadrupled its quarterly revenue.
“Lots of people are against Robinhood,” Hamza said, “but they still use Robinhood.”