Robinhood Files For Initial Public Offering, indicating that cofounders Tenev and Bhatt stand to earn billions.
Robinhood, the mobile app that pioneered commission-free stock trading, filed for its highly anticipated initial public offering on Thursday afternoon, disclosing $959 million in revenue for 2020 due to a surge in retail trading—up 245% year over year.
Additionally, the S-1 filing disclosed an incentive-laden restricted stock award plan that could result in billions of dollars for cofounders Vlad Tenev, 34, and Baiju Bhatt, 36, in the coming years. In late May, Robinhood’s board of directors approved awards of 22,200,000 and 13,320,000 restricted stock units to Tenev and Bhatt, respectively, which will vest over the course of eight years following the company’s initial public offering, depending on the performance of the company’s stock.
If Tenev and Bhatt reach each of the price-based stock milestones, which range from $120 to $300 per share for Robinhood, the total award could exceed $7.5 billion. Tenev is expected to earn approximately $4.7 billion, while Bhatt is expected to earn more than $2.8 billion.
Tenev and Bhatt are already billionaires after meeting as undergraduates at Stanford University in 2005. They first appeared on Forbes’ billionaires list last year, following the app’s August 2020 funding round, which valued it at more than $11 billion. (Each cofounder owns an estimated 10% stake in the company, valuing them at $1 billion each, according to Forbes. Robinhood’s S-1 filing did not include information about the company’s ownership structure.)
Another nugget from Robinhood’s IPO filing is the disclosure of a broad investigation into trading restrictions implemented in early 2021 in response to a surge in meme stock trading.
According to the company’s S-1, CEO Tenev and others have received requests for information and subpoenas in connection with trading restrictions on stocks such as video game retailer GameStop and movie theater chain AMC Entertainment. These inquiries came from the Northern District of California United States Attorney’s Office, the United States Department of Justice, the Securities and Exchange Commission, FINRA, the New York Attorney General’s Office, and other state attorneys general offices. According to Robinhood’s prospectus, “the USAO executed a related search warrant to obtain Mr. Tenev’s cell phone.”
The investigations demonstrate how Robinhood’s initial public offering and skyrocketing valuation occurred during a period of both rapid growth and deep problems for the company.
Since the outbreak of the Coronavirus pandemic, Robinhood’s business has grown almost exponentially, increasing its active users to a staggering 18 million as quarantined millennials used the app to trade stocks and options for free. Robinhood’s valuation has risen in lockstep with the trading boom, as the company has raised a total of $5.6 billion in funding to date, according to Crunchbase. Secondary share offerings in February ahead of the company’s initial public offering have resulted in a valuation of up to $40 billion.
The app is at the epicenter of a record-breaking increase in retail trading, particularly in option trades. Revenues more than doubled to $552 million in the first quarter of 2021, from just $77 million in the fourth quarter of 2020. The brokerage’s total user base now exceeds that of established players such as E-Trade and Charles Schwab.
Robinhood earns the majority of its revenue from trading in speculative markets. It earned $285 million in the first quarter from option and cryptocurrency trading, accounting for two-thirds of its total trading revenue. Additionally, trading in Dogecoin, a satirical cryptocurrency, accounted for 34% of Robinhood’s cryptocurrency trading. Other business lines are rapidly expanding. Securities lending, which involves the fee-based lending of customers’ shares to short-sellers, generated $35 million in revenue in the first quarter, a 448 percent increase. Interest income on margined assets increased 254% to $27 million.
Robinhood has been besieged by technical issues and regulatory investigations into the suitability of its offerings as a result of its rapid growth, particularly in the riskiest segments of the market.
A day before its IPO filing was approved, the company was hit with a nearly $70 million fine by regulatory body FINRA, which revealed how the company had misappropriated users’ funds through chronic outages during trading days and incorrectly sending margin calls on millions of option trades. “Despite Robinhood’s self-described mission to ‘de-mystify finance for everyone,’ the firm has negligently communicated false and misleading information to its customers during certain periods since September 2016,” regulators wrote in a press release. The fine, which was announced yesterday, is the largest ever imposed by FINRA.
In June 2020, Forbes reported for the first time that a 20-year-old Robinhood customer committed suicide after discovering his account had a negative $730,000 balance due to option trading. Two days later, Robinhood’s founders issued a statement promising to tighten eligibility requirements, increase educational resources, and improve the user interface for customers trading options. Alex Kearns’s family sued Robinhood in February for wrongful death.
Additionally, Robinhood’s revenue model is being scrutinized. A Forbes investigation published in August detailed how Robinhood generated the majority of its trading revenue through extraordinary speculative options trades. A sizable portion of Robinhood’s revenue is generated by the sale of its customers’ orders to trading titans such as Citadel Securities. According to Forbes, so-called PFOF or “payment for order flow” transactions accounted for the majority of the company’s revenue in the quarter a year ago, with options trades being the most lucrative.
According to its S-1, Citadel Securities, Susquehanna International Group, Jump Trading, and Wolverine Holdings generated over 80% of its transaction revenues. Citadel Securities is the largest customer of Robinhood, accounting for 27% of total transaction revenues. Citadel Securities is owned by billionaire Ken Griffin (net worth: $16.1 billion).
The Securities and Exchange Commission fined Robinhood $65 million in mid-December for failing to disclose its business relationships with these trading firms until late 2018. Robinhood made no admissions or denials regarding the SEC charges. Litigation is a constant concern for Robinhood as it grows in popularity. Its S-1 discloses a total of 49 plaintiff lawsuits and regulatory investigations into options trading, account takeovers, trading outages, and the company’s meme trading restrictions.
Robinhood has made significant investments in much-needed compliance and customer service infrastructure to address its widespread issues. That operational expense, however, came at a cost. Operating expenses increased 246 percent to $945 million in 2020, and reached $463 million in the most recent quarter alone.
The prospectus for Robinhood raises the possibility that its user base has already peaked. Both monthly and daily active users are down from their respective peaks of around 20 million and 10 million. As of March 31, the company’s filing states that monthly users totaled 18 million and daily users totaled 8 million.
Additionally, customers can withdraw their funds and trade them elsewhere. In the first quarter of 2021, 206,000 Robinhood customers withdrew a combined $4.1 billion from the brokerage, accounting for 5% of total assets under custody. The dollar amount was ten times the average quarterly cash redemptions made by customers in 2020 and four times the average amount withdrawn from assets under custody.
It now competes with established discount brokerages such as Fidelity, E-Trade, TD Ameritrade, and Charles Schwab, all of which have eliminated trading commissions. Webull and Acorns, which announced a $2.2 billion SPAC deal in late May, are among Robinhood’s startup competitors.
While Robinhood’s upcoming initial public offering will likely garner the most attention, fintech startups of all stripes are clamoring for a taste of the public markets this year. Two examples: Marqeta, a debit-card issuer, completed an initial public offering in mid-June, making its founder a billionaire; and Flywire, a company that enables organizations to accept foreign-currency payments, completed an initial public offering in May at a $3.5 billion valuation. According to CB Insights, the first three months of 2021 set a quarterly record for fintech exits.
There are additional riches to be had—particularly for Robinhood’s co-founders. Robinhood was founded in 2013 with the mission of “democratizing finance for everyone,” and its cofounders stand to make billions when the app goes public.
If Robinhood becomes the next great meme stock to trade, it may attract customers. Robinhood stated in its prospectus that it will reserve up to 35% of its initial public offering for customers to purchase through the brokerage.
