A Rundown of Robinhood’s Regulatory Troubles Prior to its IPO
Robinhood, the brokerage that brought ‘commission-free’ stock trading to the public through its sleek, easy-to-use app, is slated for an IPO on July 29. The broker expects a market valuation along the lines of $35 billion in its upcoming IPO, which would value its shares at a range of $38 to $42.
While Robinhood has unveiled that it will give retail traders access to its IPO, there are a number of factors any investor should consider before jumping in. Above all, Robinhood has recently been inundated with regulatory concerns, and features a track record of big penalties.
How Things Went Wrong for Robinhood
With the claim of “democratizing investing,” Robinhood has been quite successful in attracting hordes of retail investors. The broker’s charming app with commission-free trades further added momentum to this stream, onboarding a swarm of new investors.
However, things started to go wrong for the popular stock trading app when it restricted trading on select retail stocks such as GME and AMC. Even worse, the firm has reportedly closed positions of thousands of retail traders without their consent.
While Robinhood justified the stock trading sabotages with “market volatility,” soon more questionable aspects of the drama unfolded. Citadel, the hedge fund that pays Robinhood through a Payment for Order Flow (PFOF) model, is the same entity that poured billions into Melvin Capital — one of the major short-sellers of the GME stock.
Furthermore, numerous earnings reports from Robinhood suggested further potential issues. Transaction rebates and the controversial PFOF system—which is outlawed in Canada and the UK—constitute 75% of Robinhood’s entire 2020 revenue, and 81% of the company’s total revenue in Q1 2021.
Nevertheless, the company has been fined numerous times for spreading misleading information and halting trades which it then justified by system outages.
Robinhood’s Pre-IPO Regulatory Troubles Explained
Last month, the Financial Industry Regulatory Authority (FINRA) fined Robinhood a historic $57 million in penalty. The regulator also ordered the company to pay an additional $12.6 million in restitution to the customers that it wronged. The fine, which sums to a total of $69.6 million, is the highest penalty ever issued by the regulatory body.
Moreover, just recently, Robinhood said that the company’s cryptocurrency arm expects to pay a $30 million fine to end an investigation by financial regulators. Describing this penalty, the company said in paperwork filed for a public listing:
“[Robinhood Crypto] and the [New York Department of Financial Services] have reached a settlement in principle with respect to these allegations, subject to final documentation, in connection with which, among other things, [Robinhood Crypto] expects to pay a monetary penalty of $30 million and engage a monitor.”
Further, the company announced yesterday that regulators are investigating the fact that Robinhood CEO Vlad Tenev is not licensed by FINRA. Robinhood said the investigation is related to the “non-registration status” of the company’s CEO Tenev and co-founder Baiju Bhatt.
A Look into Robinhood’s Explosive Growth
Despite all of the aforementioned controversies surrounding Robinhood, the company has not encountered any shortage of funding. The broker has raised a total of $5.6 billion in 24 rounds of funding, with the latest raise having taken place on Feb 1, 2021, from a convertible note round.
In terms of revenue, Robinhood was notably profitable in 2020, generating a net income of $7.45 million on net revenue of $959 million — which is a 245% growth rate compared to 2019. In comparison, the company endured a loss of $107 million on $278 million net revenue in 2019.
In Q1 this year, Robinhood’s revenue increased by a staggering 263%, totaling $331 million, according to an SEC earnings report. As of March 31, 2021, the company had 18 million funded accounts, up from 12.5 million at the end of 2020.
How will Robinhood’s recent fines and regulatory concerns affect its IPO? Let us know what you think in the comments below.