Robinhood Markets Inc. (Robinhood), a US Internet broker known as the “Retail Investors Base” filed a preliminary prospectus with the U.S. Securities and Exchange Commission (SEC) on July 1st for its initial public offering (IPO). And will list its shares on the Nasdaq under the ticker symbol HOOD.
About Roinhood’s IPO
In Robinhood’s filings with the Securities and Exchange Commission, the brokerage platform disclosed its business growth. In the first quarter of 2021, the company’s total revenue was $522 million, up 309 percent from $128 million in the same period in 2020. Robinhood currently has approximately 17.7 million monthly active users.
Remarkably, Robinhood’s revenue growth was partly due to the performance of its crypto asset trading business. In the first quarter of this year, 17% of the company’s total revenue came from the cryptocurrencies business, with seven encrypted assets on the shelves with a total trading volume of $88 billion, a 23-fold increase over the same period last year, with dog currency trading accounting for 34%.
Innovative Business Model
Robinhood has not played as usual since its inception in 2013. They shattered paradigms of traditional financial services by building mobile-first products and services to attract retail investors to trade stocks. With no commission fees or account minimums, Robinhood resulting in rapid growth.
Currently, Robinhood’s main profit model is to send orders to market makers to make money- extracting a percentage of the orders’ amount.
To gain a foothold in the fierce competition for brokerages, Robinhood has innovated a trading model that allows users to split and buy shares. Just as crypto asset investors can buy 0.001 or less Bitcoin, stock investors don’t have to spend $23,000 on Robinwood to buy a Google or Amazon stock, they can buy a fraction of each share for a smaller amount of money.
Another Robinhood initiative to attract new users is to get a free share as long as they register with Robinhood.
Robinhood has successfully attracted a large number of retail investors to register by offering commission-free support for splitting and trading stocks and giving away shares. Statistics show that about half of Robinhood’s current 18 million users are first-time investors, with a median age of just 31. The median account size is only $240, and the average account size in February is only $5,000.
The influx of retail investors has given Robinhood the title of “Retail Investors Base”. In January, it also played a major battleground in the US stock market’s “Short Squeeze War” as retail buyers of stocks such as GameStop.
35% of Its Class-A Shares in Its IPO to Its Users
In return for the support of retail investors, Robinhood plans to allocate 20 % to 35 % of its Class A shares in its IPO to its users, who can participate in the subscription through a new feature called IPO Access on Robinhood.
This arrangement, which Robinhood has recently offered for a handful of other pre-IPO companies, is likely to prove popular among retail investors who have long complained the traditional IPO process unfairly gives deep-pocketed investors first dibs on shares.
The Night before IPO: $70 Million Fine from FINRA
The day before it filed its IPO application, the U.S. Financial Industry Regulatory Authority (FINRA) issued the company with the largest ever fine, totaling about $70 million. The penalties relate to failures such as a system outage by Robinhood in March 2020, a lack of due diligence prior to approving an options transaction by a client, and misleading information about margin trading to a client. FINRA says these factors add up to the detriment of millions of users of the platform.
In addition to customer litigation and regulatory penalties, its encrypted asset trading business is seen as an unstable factor.
In fact, Robinhood had planned to make an IPO in June, but the plan was delayed because the SEC was reviewing its crypto asset trading business. The SEC has been asking Robinhood about its growing crypto asset business, according to a June 25 report by caixin.
Robinhood’s IPO will come as a landmark financial event given how the trading app has become an iconic brand among millennials. Since launching in 2013, Robinhood has introduced millions to the world of investing while upending the traditional brokerage industry with a slick app and zero commission trading model.