Robinhood to Promote As much as $770M Value of Shares to Clients Earlier than Going Public
Standard brokerage app Robinhood is taking an uncommon step within the inventory market, permitting customers of the app to purchase as much as $770 million value of its IPO shares earlier than going public.
The plan additionally presents dangers ought to traders promote their shares shortly, and sometimes inventory is obtainable solely to institutional traders and firm insiders earlier than going public. Robinhood will start buying and selling on the Nasdaq Thursday underneath the “HOOD” ticker image.
The corporate’s estimate of $770 million value of shares being provided to prospects relies on an providing worth of $40 per share. In a submitting with the Securities and Alternate Fee final week, the value was determined as a midpoint in a spread of $38 to $42 per share.
With as much as a 3rd of its IPO shares out there to unusual traders earlier than going public Thursday, Robinhood is seeing a market valuation of as much as $35 billion.
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Early entry can doubtlessly give traders an enormous benefit if shares transfer increased as soon as they debut. Between 2001 and 2020, the typical U.S. IPO returned 14.5 p.c from the provide worth on day one, in accordance with Renaissance Capital. Thus far this yr, the bounce is even higher, at 34 p.c. For IPOs which have raised no less than $100 million, the typical first-day return this yr is 25 p.c.
However increasing early entry past Wall Road insiders is not with out danger, particularly provided that Robinhood is making out there such a big chunk of its providing to customers by way of its personal buying and selling platform. The transfer might backfire if many particular person traders, also known as retail merchants, flip their shares for a fast revenue, fairly than maintain them, stated Matt Kennedy, senior IPO market strategist at Renaissance Capital.
“The foremost draw back, and the explanation that is so uncommon, is issuers sometimes place quite a lot of worth on the funding financial institution’s capacity to put the shares with institutional, long-only traders who perceive the enterprise, imagine in it and have completed their homework,” Kennedy stated. “Retail merchants have extra of a status of flipping, so this might lead to increased volatility.”
Whereas giving particular person traders a shot at pre-IPO shares is uncommon, there have been some high-profile examples lately.
Journey-hailing apps Uber and Lyft gave their drivers a manner to purchase IPO shares, whereas on-line market Etsy let its customers get a bit of its IPO. Some corporations additionally elect to go public by way of what is called a direct itemizing. That is the place an organization sells its shares to the general public with out involving underwriters. So, basically everyone seems to be on equal footing.
Robinhood’s method stands out primarily as a result of it’s setting apart as much as 35 p.c of the IPO shares for its customers. That is the most important portion by far of pre-IPO shares to be designated for retail traders in an underwritten providing, Kennedy stated.
Robinhood not too long ago rolled out IPO Entry, a platform that permits customers to get in early on IPOs. The primary such IPO made accessible to Robinhood customers was Figs’ inventory market debut in Might. Shares within the on-line scrubs vendor soared 36 p.c on their first day of buying and selling.
Robinhood customers curious about shopping for shares of the corporate by way of its platform should join the IPO Entry function. As soon as there, they place a “conditional provide to purchase,” or COB, and say what number of shares they hope to buy. That conditional provide would not change into an official order till the IPO is priced, doubtless Wednesday night time.
Robinhood has warned that customers of IPO Entry might get the total variety of shares they need, or a partial quantity, or none in any respect, relying on demand and different elements.
Robinhood is discouraging customers from flipping shares they purchase by its IPO platform. The corporate warns that customers who promote IPO shares inside 30 days of the IPO will probably be restricted from shopping for shares in IPOs for 60 days.
Which will clarify the two-pronged method Robinhood consumer Allen Tran of New York is taking.
The 23-year-old, who started utilizing Robinhood in 2016 and hosts on-line communities of traders, says he has signed up for Robinhood’s IPO platform and intends to purchase shares within the firm and maintain them “for a really very long time.” Tran additionally plans to make use of one other buying and selling platform to purchase shares in Robinhood as soon as they make their debut after which “scalp,” or promote these instantly to revenue on what he expects will probably be an enormous first-day pop within the inventory.
“I will watch the inventory rally with hype, then I will get out comparatively shortly, banking my income,” Tran stated.
And if the inventory ought to open beneath its providing worth?
“I might be very, very shocked if that occurs,” he stated. “If that does occur, that simply implies that I can purchase extra shares with the identical quantity of capital.”
