Robinhood IPO: Investors’ Worries Include Regulatory Risks, Security Breaches and Ongoing Mismanagement

Last Updated on July 26, 2021

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Robinhood Markets will make an initial public offering (IPO) of its stock, if all goes as expected, on Thursday, July 29. Potential investors should not allow themselves to be hyped into participation. There are reasons for concern about the enterprise.

On Monday, July 19, Robinhood, a zero-commission online brokerage known for its eponymous app, filed a document with the Securities  and Exchange Commission announcing that it will be selling 52.4 million shares for the company, which will be listed on Nasdaq with the ticker symbol HOOD.

The founders and chief financial officer of Robinhood will be selling 2.6 million of their own shares into the IPO. So the total number of shares for sale is 55 million.

The underwriters, led by Goldman Sachs, Citigroup and JPMorgan,   have a “greenshoe option,” that is: they may sell more than originally planned, up to 5.5 million shares more, if there is an unexpected amount of market demand for the stock.

Robinhood estimates the IPO price at between $38 and $42. The high end of this scale implies a company valuation of $2 billion.

Some Background on Robinhood

The founders launched the app in April 2013. The original idea was simply to market a stock tracker, a mobile equivalent of Yahoo Finance. But Yahoo itself went mobile, as did Google Finance, and they pushed Robinhood out of that space.

Robinhood had shifted to become an online brokerage by March 2015. It has since raised money from high-profile venture capitalists, including Ribbit Capital and Andreessen Horowitz.

But earlier this year saw a breakthrough into public consciousness. A contributor at the Nasdaq website describes Robinhood as one of the most anticipated IPOs of 2021 to date, largely because of the attention the company attracted early this year after a group of retail investors used the Robinhood platform to try to squeeze some prominent hedge funds by investing in GameStop.

In January, when the GameStop drama began, visits to retail brokerages spiked. The upward trend continued through February, and leveled off in March.

Robinhood specifically received more than 200 million visits in both the first and the second quarter of this year.

Regulators, Breaches, and Mismanagement

There are matters that ought to concern anyone who is thinking of investing in Robinhood, either via the IPO or some time soon thereafter.

First, there is regulatory risk. Robinhood depends upon “payment for order flow,” a revenue stream that has drawn its share of critics. Should regulators or legislators prohibit PFOF, a real possibility, it would suffer a body blow to its whole business plan.

Secondly, there have been worrisome security breaches, which may not bode well for the public company.

The security breaches included an acknowledgement last October that almost 2,000 Robinhood Markets accounts had been compromised in a hacking spree.

The acknowledgement came only after a Bloomberg investigation. Bloomberg spoke to people like Robert Riachi, a 23 year old Canadian software engineer.  Riacchi told the news service that thousands of dollars were missing from his Robinhood account. Its customer support team had asked him for supportive information, but then had been tardy about getting back to him about any progress with its inquiries.

“It’s kind of ridiculous,” Riachi said, “that an investment app that’s handling people’s livelihoods, people’s money, has the audacity to make people wait several weeks to hear back anything.”

That leads into our final concern: a sense of pervasive mismanagement. It may be that Robinhood became too big too quickly, and outgrew its founders’ ability to adjust and delegate.

Notoriously, in November 2019, a user on the WallStreetBets subreddit disclosed a glitch that would allow some users to borrow unlimited funds (“infinite leverage”) by way of selling covered calls. The idea was that leverage could be used to buy shares, then a covered call could be sold on them. Then the premium from the covered calls could be use to buy more shares, leading to the sale of more calls, and so forth.

The loophole – which came to be known in Wall Street Bets as the “infinite money cheat code” – was closed soon thereafter. But that and other incidents are not reassuring.