Robinhood’s other drama — a midyear IPO

San Francisco/New York — For months, Robinhood Markets’ plan to pursue a mid-year initial public offering (IPO) looked more and more auspicious. Now, it looks increasingly critical.

As 2021 began, investors stuck at home kept signing up for the firm’s popular no-fee trading app, even ploughing US stimulus cheques into fresh bets on ever-rising stocks.

People close to the brokerage said it was planning to hold an IPO around May. The timing would be fortuitous: before summer and widespread vaccinations let droves of users return to pre-pandemic hobbies.

But now, Robinhood is at the centre of a storm over its emergency move last week to limit bets on a list of volatile shares such as GameStop. Price swings in the stocks forced the brokerage to raise billions of dollars in funding to keep up with clearing houses’ rising demands for collateral. As customers cried foul, lawmakers and regulators vowed to examine Robinhood’s decisions, threatening to fuel legal and compliance costs.

A swift public listing would let the company capitalise on its rapid growth of the past year — and provide a potential windfall for investors who stepped in to support the firm during its crises at hand.

Indeed, people close to Robinhood said the start-up plans on moving ahead with an IPO. And alternatively, one person said, the brokerage could pursue a debut via direct listing or a deal with a publicly traded “blank-cheque” firm, known as a special purpose acquisition company (SPAC).

Unicorns, including online lender Social Finance, and real estate venture Opendoor Technologies have agreed to merge with SPACs in recent months. The manoeuvre avoids a cumbersome IPO process that includes a roadshow, where the response from investors can dramatically re-set a company’s valuation.

No matter how it goes public, two people said, a stock listing could make it easier for Robinhood to muster financial resources in the future to help meet any regulatory requirements. Nora Chan, a spokesperson for Robinhood, declined to comment.

Pandemic pastime

Robinhood has been planning for a May debut since at least late in 2020, according to people familiar with the matter, who asked not to be identified because the deliberations aren’t public. While that plan hasn’t changed, the firm has yet to make a final decision on timing, so it could still be adjusted, the people said. Executives have been so focused on dealing with the current crisis in recent days that going public hasn’t been the top priority, the people said.

Successful market debuts are often a matter of showing well-timed momentum to the investing public — and at the moment, Robinhood has that in spades. The company signed up millions of users after the pandemic locked down commerce in 2020, leaving people looking for ways to make extra money while passing time indoors. The firm is still building out its customer-service, compliance, legal and lobbying operations to handle the influx. In other words, its costs have yet to catch up.

The spring-loading of new customers may prove attractive to public investors willing to bet that Robinhood can use the funds to mature. But after Robinhood’s customers picked a fight with hedge funds in January by sending shares of GameStop and other beaten-down companies into the stratosphere, the brokerage felt the strain of unexpectedly steep collateral calls.

CEO Vlad Tenev recalled how his firm received a demand for about $3bn around 3.30am on Thursday. The amount was “an order of magnitude more than it typically is”, Tenev told Elon Musk over the weekend on social-conversation app Clubhouse. The brokerage, which, by that point, had raised about $2bn from venture capital investors, among others, saw the clearinghouse’s collateral call fall to $700m, Tenev said.

Robinhood had more than $1bn on hand to cover it, but Tenev and the firm’s investors were so alarmed that the call might herald a wave of demands that executives set out to raise more funds quickly, according to a person with knowledge of the situation. The concern is that the social media phenomenon driving spikes in stock prices might continue.

“I don’t think they ever anticipated that they would end up being the battleground for a showdown between traditional Wall Street and the individual investor, but that’s really what they are right now,” said Cait Lamberton, a professor of marketing at the University of Pennsylvania’s Wharton School.

Convertible notes

Investors led by Ribbit Capital have since poured $3.4bn into the firm in a two-part convertible note issuance. The first $1bn disclosed last week morphed into a $2.4bn tranche and will convert into equity at a $30bn valuation — or a 30% discount to an eventual valuation in a public listing, whichever is lower, according to people with knowledge of the terms.

A subsequent $1bn infusion will be converted at the lower of a 30% discount, or a $33bn valuation, one of the people said.

Some participants in the financing, seeking to reduce their exposure to the company, have begun syndicating out portions of their stakes, people with knowledge of the matter said.

To investors, the convertible notes offer the allure of potentially mammoth returns in a public listing, which could put additional pressure on the company to maintain its May timeline.

Once public, the company would be better positioned to quickly issue equity or secure additional credit, if there ever is another emergency.

Bloomberg