Fast-growing, Controversial Robinhood Set For Market Debut

Robinhood has said its mission is to "democratize finance for all," and that stretches to its plan for the company's debut on public markets Thursday.

The online investment platform, which is expected to begin trading under the ticker symbol "HOOD" on the Nasdaq, has set aside up to 35 percent of the shares under its initial public offering for sale to its users.

Individual investors are normally excluded from IPOs, making Robinhood's move the latest rupture with tradition in its speedy rise that has only accelerated during coronavirus pandemic.

On Wednesday night, the company said it raised $1.9 billion in an initial public offering priced at $38 per share, at the low end of the range in its prospectus.

The firm, whose commission-free stock trading model has been copied by some rivals, had $81 billion in assets under its custody at the end of March, up from $14.2 billion at the end of 2019.

Its entry to public markets is among the most buzzed about in recent memory, sparking enthusiasm over a valuation of around $32 billion, but also skepticism over its business model and prospects for continued growth.

Robinhood was founded in 2013 by Vladimir Tenev and Baiju Bhatt, who met as undergraduates at Stanford University.

The company has pitched itself as a niche for underinvested "everyday people," according to a prospectus that points to the need to serve "the next generation of investors," who are younger and more diverse than earlier cohorts. Robinhood's median customer age is 31.

Robinhood's growing population of individual investors has played a role in the so-called "Reddit Rebellion," during which retail investors coalesced on the social network this year to support beaten-down stocks such as GameStop and BlackBerry.

The company has significantly grown its user base during the pandemic, more than doubling the number of accounts to 18 million at the end of March.

Robinhood's plan for growing further includes attracting more customers, providing additional financial services to customers as they add wealth and expanding internationally.

But Robinhood's rise has not been without controversy.

Last month, shortly before the company filed papers to go public, it agreed to pay a $70 million fine to settle charges from regulatory body FINRA that it harmed thousands of consumers through "false and misleading" communications and other lapses.

The company has also been in the crosshairs of US Securities and Exchange Commission (SEC) Chair Gary Gensler, who has taken aim at its business model.

Although Robinhood does not charge users commissions to trade, it takes in revenue from other financial firms by routing its users' trades to these firms, a practice known as "order flow" that is barred in other countries including Britain and Australia.

Gensler said such arrangements raise questions about conflicts of interest and also enable firms to trade consumer data.

He has cited an SEC enforcement action in December against Robinhood that accused it of maintaining higher costs for traders in exchange for receiving payments from other firms to execute trades.

While a complete overhaul barring these payments is probably not in the cards, "changes to the current rules could (temper) revenue growth or increase compliance costs," according to Third Bridge's Peter Hobson, who notes that there are more investigations outstanding.

A bigger unknown may be the platform's fate when the stock market is less forgiving than over the last year, during which investors across the board have benefited from climbing equity values.

"How is their platform going to react and how is their client base going to react when there is a bear market and things are not so easy?" asked Briefing.com analyst Patrick O'Hare.

More questions concern Robinhood's efforts to expand beyond its current trade offerings in stocks and cryptocurrency.

For example, Tenev said during an investor presentation last weekend that Robinhood was considering offering retirement accounts.

But such products are currently a big business for incumbent financial companies, which are still many times the size of Robinhood and will fight to defend their market share, analysts said.