Goldman Sachs – ‘$40 billion’ Robinhood app tries to vault SEC hurdles
It’s a lot of money for a stock-trading app that’s supposedly free.
Robinhood is slated to launch an initial public offering before summer’s end that could value the Silicon Valley-based company at $40 billion or more, people close to the underwriting group say. That would make it among the biggest deals of the year — and certainly the most anticipated as the day-trading app became a cultural phenom during the pandemic.
A blowout IPO would be remarkable for a company created only in 2013 and which has survived its share of controversies. Last summer, I warned that Robinhood was luring in amateurs stuck at home during the COVID lockdowns who took on day trading as a sport. They would eventually lose their shirts trading stocks on its free and easy-to-use platform, and regulators would pounce.
The party, I predicted, wouldn’t end well and it almost didn’t. Amateur traders are the lifeblood of Robinhood and its user growth, and they lost lots of money on the wrong side of bets. Then came January’s meme-stock controversy, where clearing problems stymied trading of some high-volume stocks on the app, angering customers. The company’s business model came under scrutiny. Congress held hearings about the episode following the wild swings in various stocks that traded over the platform, and the IPO that was planned for March was pushed off indefinitely.
But for all the noise, the clients just kept coming — and the IPO is back on. The reason is simple, company execs tell me: Robinhood is printing money. Despite the hiccups, Robinhood added some 6 million additional new customers for its crypto platform alone in the first two months of the year.
Now the app’s explosive user growth has investors clamoring for a piece of the action, people close to the deal say. And mind you, underwriters and company officials are quietly calculating their $40 billion valuation for a product that founder Vlad Tenev essentially conjured up in his dorm room.
So what could screw it up? The Fed has signaled it won’t raise interest rates for the foreseeable future, which should keep stocks attractive to investors. And with the Fed still printing money and the pandemic receding, the economy will likely keep growing, lessening worries about a market bubble. All of that is good for stock prices and bitcoin — which, like other cryptocurrencies, is fuel for Robinhood’s growth engine.
There is, however, one potential roadblock to the deal that bankers are quietly discussing behind the scenes: a Securities and Exchange Commission that either blocks the IPO or forces the company to disclose so much information about its business model that investors walk away.
Gary Gensler, the SEC chairman, hinted at a recent congressional hearing how the commission might make the IPO difficult by taking aim at the various ways Robinhood makes money. “Some academic studies suggest more active trading or even day trading results in lower returns for the average trader,” he stated. Translation: Get ready for possible regulation or enforcement actions that make day trading more difficult.
Robinhood makes big bundles of cash by selling customer orders to brokers so it can advertise “no commissions” on trades. On Wall Street, the practice is known as “payment for order flow,” but Gensler questioned if “broker-dealers have inherent conflicts of interest . . . to encourage customers to trade more frequently than is in those customers’ best interest.”
One person close to the company assures me that Robinhood’s lawyers and bankers will mitigate any of the SEC’s concerns, and the IPO will happen within a “couple of months.” Bankers include Goldman Sachs and JPMorgan. Shares will likely be listed on the Nasdaq, which specializes in tech IPOs.
In March, Robinhood confidentially filed an IPO prospectus, known as its S-1, so it can get the commission comfortable with its disclosures. So far, executives have received no major pushback, including on the payment-for-order-flow issue, people close to the company say.
They also remind me that the firm has made strides in cleaning up its image as a gambling den. Its Web site now displays more PSA-type disclaimers about the benefits of long-term investing. And to address Gensler’s concerns about “gamifying” trading, there are no more digital confetti showers on your screen after you buy a stock.
Tenev, meanwhile, has begun a campaign to show how new tech could make trades settle instantly instead of the two-day lag period. Known as T+2, the lag under normal conditions is a bump-free, back-end feature of the clearing process. But it helped spur conspiracy theories when it forced Robinhood to halt an overwhelming frenzy of volatile trades on GameStop and other red-hot “meme stocks” in late January. The lag also helped spur a liquidity crisis that forced Robinhood to raise more than $3 billion in cash over a period of days.
Whether all of this is enough for the SEC is anyone’s guess. Personally, I find it difficult to believe even an aggressive regulator like Gensler — who answers to both President Biden and business-hating US Sen. Elizabeth Warren — will put the brakes on capital formation and kill a deal. All those years Gensler spent as a banker at Goldman Sachs have to be worth something.
That doesn’t mean the SEC chief and his commissars won’t make life difficult for Tenev & Co., forcing Robinhood and its bankers to disclose every possible regulatory impediment to growth that might come. If so, they might have to kiss that $40 billion valuation goodbye.