After settlements, lawsuits and historic losses, Robinhood announced their plans to go public today, revealing more information about the company’s wild year.
What’s Robinhood, again?
Robinhood was founded by two Stanford college roommates Vlad Tenev and Baiju Bhatt, which aimed to make trading more accessible for the masses by letting users buy and sell stocks without having to pay a commission or any additional fees.
The trick is that Robinhood makes their money through interest, rebates and premium accounts that allow users to make investment opportunities that are not allowed for free users.
This model of not charging a commission fee was revolutionary for the stock trading industry.
By offering a chance for users to trade shares for free, Robinhood ended up forcing other brokerage firms to stop charging commissions as well.
“Robinhood pioneered commission-free investing in stocks,” said Tenev, Robinhood’s chief executive officer to CNN Business, back in December 2019. “We can be really proud of not just creating a world where our own customers don’t pay commissions, but customers of other brokerages have benefited as well.”
How much has Robinhood grown?
Based on Robinhood’s Initial Public Offering (IPO) filing, it showed that the app has 30 million users with 18 million actively trading accounts plus US$80 billion in assets. So, just to put this asset growth in perspective, last March, this figure was at US$19.2 billion.
In terms of the 18 million actively trading accounts, this is a 151% increase from March last year where there were 7.2 million funded accounts, meaning people with Robinhood linked to their bank accounts.
In 2019, Robinhood made a loss of US$107 million with revenue at US$278 million. But, things quickly turned around when the pandemic hit and millions of bored millennials taught themselves online stock trading during lockdowns using the accessible Robinhood platform to do so.
According to Business of Apps, the average account size with the platform is about US$3,500. This is compared to US$100,000 with E-Trade, US$110,000 with TD Ameritrade and US$240,000 with Schwab.
So far, many startups this year have failed to show a profit before going public, but Robinhood was profitable in 2020, generating a net income of US$7.45 million on net revenue of US$959 million.
But, after some chaos related to the GameStop trading situation, which dominated the news for an exhausting amount of time, as well as a death of one of their users, Robinhood has found itself in legal crosshairs.
What GameStop trading situation, again?
Aside from a Securities and Exchange Commission (SEC) investigation in late 2020 that led to Robinhood paying a US$65 million fine, the company was thriving.
But, everything changed in January this year when a group of Redditors decided to take Wall Street into their own hands in the GameStop Short Squeeze.
When GameStop’s value saw an increase of over 1,700% during a short squeeze, which is when a stock price rises rapidly unexpectedly, by a group of Redditors, brokerage firms such as Robinhood began to panic because they weren’t able to cover the costs of the transactions on their side to make the stock purchases for their users.
While a user may buy a share on a Wednesday, the user wonn’t actually own it until Friday. Between that time, Robinhood basically covers the cost of the purchase until the transaction is completed.
In order to compensate for this, the company halted trading of certain stocks such as GameStop. And, while it may seem like it isn’t the company’s fault, Carlos Domingo, CEO and founder of Securitize, a security token firm and registered transfer agent with the SEC believes that Robinhood could have prevented this from happening.
“The fact that Robinhood missed that, in my opinion, is a sign of mismanagement on their side,” he said. “They did definitely make people lose money because of their lack of planning.”
What legal problems are Robinhood facing now?
The sudden halt on trades was a massive problem for countless users as they saw their investments plummet in the middle of this short squeeze, and to make matters worse, the company was unable to timely respond to customer complaints.
Robinhood eventually opened up trading again for these stocks, but the damage had already been done.
Robinhood was met with lawsuits, government probing and an investigation from Wall Street’s watchdog – the Financial Industry Regulatory Authority (FINRA).
None of these lawsuits were really public knowledge until the IPO was released, which revealed all of Robinhood’s legal battles.
What did the IPO filing reveal?
For starters, the IPO’s release revealed that the company lost an incredible US$1.4 billion during the GameStop Short Squeeze even though they had a profitable 2020.
On Wednesday, it was announced that Robinhood settled their lawsuit with FINRA, which took almost US$70 million from the company, including a US$57 million fine and about US$12.6 million in payments to aggrieved customers.
While the settlement was costly and garnered the most news, the IPO revealed a shocking court settlement where a family sued the company after their son, Alex Kearns, a 20-year-old college student, took his own life in mid-2020 after mistakenly believing he owed US$730,000 to the company.
According to his family, Kearns attempted to reach out to Robinhood and after multiple failed attempts to get in touch with the brokerage firm. Kearns tragically took his own life.
The loss of Kearn’s life after not being able to communicate with Robinhood only furthered FINRA’s argument that Robinhood has “systemic supervisory failures” and giving customers “false or misleading information.”
It’s an interesting time for an IPO to say the least.
The IPO filing also showed that Tenev’s phone was seized and that he had received requests for information from United States government bodies such as the Department of Justice (DOJ).
According to a company statement, they’ll be listed under the ticker symbol “HOOD.” The number of shares that will be offered and at what price range has not yet been decided.
It’s important to remember, Robinhood is in a fiercely competitive market with the competitors also as aggressive about staying in the game.
Where Robinhood is hoping to differentiate itself in the market is by honing in on the fact that they offer cryptocurrencies. But so do PayPal and publicly-listed Coinbase.
On top of that, Chinese trading app WeBull, is looking to replicate Robinhood’s gamified style of investing. Meanwhile, Charles Schwab has also recently acquired TD Ameritrade for a staggering US$26 billion while Morgan Stanley also bought E-Trade in October of last year.
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