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Protocol | Fintech

What’s up with Robinhood’s IPO?

The company's trading business is on fire, fueled by payments for order flow. Is the key to its success also the reason why we still haven't seen its S-1 filing?

Nasdaq site in Times Square

Robinhood has reportedly chosen the Nasdaq market for its trading debut. But timing of its IPO remains unclear.

Photo: Meriç Dağlı/Unsplash

Where did Robinhood's IPO go?

It's been nearly three months since the company kicked off the process of going public. But since Robinhood announced on March 23 that it had submitted a confidential draft registration with the Securities and Exchange Commission, not much has been heard about one of the year's most anticipated public trading debuts.

That could change next week. Robinhood, which had been expected to pull the trigger this month, reportedly now plans to hold its IPO after the July 4 holiday break. That means the company would have to file its IPO disclosures, known as an S-1, publicly with the SEC by next week in order to meet the requirement of doing so 15 days before the first day of trading. (That's assuming it skips the traditional roadshow where companies present their financials to investors; during the pandemic, those have generally been held over Zoom on a compressed timetable, and a company as well-known as Robinhood may feel it doesn't need to do the dog-and-pony show.)

But Robinhood has had a rough year, which experts speculate could be the reason for the delay. The company began its IPO process after a series of high-profile controversies. The biggest one, the GameStop trading frenzy in January, led to congressional hearings and closer regulatory scrutiny that some experts say could even affect its business model.

"It's been a bumpy road," David Musto, a finance professor at the University of Pennsylvania's Wharton School, told Protocol. "People are generally bullish on it. But there's just this big question mark."

Robinhood, whose trading app blazed the trail in commission-free retail investing, was valued at about $12 billion late last year. It's expected to be worth as much as $40 billion when it goes public.

The company could not be reached for comment — understandably so, given the quiet period requirement for companies in the process of going public. It also would not be surprising that, like most IPOs, its registration has been subjected to rigorous SEC review.

"Every IPO gets pushback from the SEC," Santa Clara University law professor Stephen Diamond told Protocol. "It's expected that you're going to get comments, you're going to have to make revisions. You could easily go through four or five amendments over a period of several months, and, from start to finish, the process could take six to nine months to get out the door."

But Robinhood is going public under unusual circumstances. Events in the last six months could have led to closer scrutiny of the company from the SEC, experts say.

R.A. Farrokhnia, a Columbia Business School professor and executive director of the school's Advanced Projects and Applied Research in Fintech initiative, said Robinhood "came to the forefront of the conversation" about retail investors and questions on whether its app "makes it too easy or gamifies" stock trading.

The GameStop trading controversy in January turned the spotlight on allegations that Robinhood had made stock investing too risky for young and inexperienced investors drawn to stocks not by their fundamentals but by buzz on social media. And the company clearly failed to manage the PR fallout which led to "a reputational hit," Farrokhnia said.

At one point, Robinhood was forced by stock clearinghouses to halt purchases of GameStop shares, a fiasco that triggered lawsuits. Diamond said that could have prompted the SEC to ask, "OK, you're dealing with a lot of litigation. What's going to happen with these class-action lawsuits?"

He said the SEC will likely also pick apart the company's finances after it appeared to face a sudden capital crunch during the GameStop incident. The company raised $3.4 billion in new capital in February at the height of the trading frenzy, including $1 billion to meet deposit requirements to support customer trades.

"There's some big questions raised about the $3 billion emergency cash infusion that they got right in the middle of the GameStop crisis," Diamond said. "I don't think anyone in the public realm is satisfied with the explanations provided by [Robinhood CEO] Vlad Tenev in any of his public appearances."

The delay could also be due to demands from institutional investors that Robinhood is trying to woo. The company is allowed to talk to institutional investors privately, and these institutions may have requested changes in the way the company is set up, Diamond said. For example, he said, an institutional investor, such a major pension fund, may have asked, "Where are your independent directors? That's what we care about. Because we want adult supervision."

That might explain Robinhood's June 1 announcement that it was adding three new independent directors.

The most serious issue that could be causing the delay involves a core element of its business, payment for order flow. Robinhood generates revenue through rebates for sending trade orders to high-frequency trading firms and market makers. This suggests there's an incentive for Robinhood to encourage customers to make more trades. Critics, including new SEC Chairman Gary Gensler, say the practice presents an inherent conflict of interest.

"We all know that Congress and the SEC are looking hard at payment for order flow," Musto said. That could be an issue that Robinhood is being asked to address, he added: "The regulatory landscape could change in a way that makes it less lucrative to do what they do."

Diamond echoed this view, noting that payment for order flow is a key part of how Robinhood makes money. "Any constraints on that would obviously put a crimp in their revenue growth," he said. He said the SEC could be asking them: "Do you have sufficient disclosure in the registration statement about the impact on your business model of any potential regulations on payment for order flow?"

However, it is unlikely that these questions would completely derail Robinhood's intention to go public, Diamond said.

"It's extremely rare for the SEC to say to accompany, 'No, you're not going public,''' he said. But major aspects of Robinhood's business, including the lawsuits, its cash reserves and the potential impact of new regulations, "are all going to get a very close look," which could be slowing the process down.

"The bankers may have been telling them 'It's a hot IPO market, let's get out there,'" he said. "They're telling their VCs, 'This is a great market. Let's get out there in the spring.' It could be that the SEC said, 'Wait a minute.'"

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