NEW YORK, July 1 (Reuters Breakingviews) - Robinhood Markets hasn't even filed its IPO prospectus publicly yet. Fittingly for the favored trading app of social media-driven meme stocks like GameStop (GME.N), the rumors are already spreading. The company is considering allocating up to 35% of the shares in its initial public offering to retail investors through its own IPO platform, according to the Wall Street Journal. A wider pool of nonprofessional investors will probably set a higher price. But there's a risk customers may not end up happy.
Robinhood’s mission to democratize finance makes it natural to sell shares to its users. Many stocks, especially in buoyant markets, pop on their first day of trading, allowing institutions to cash in having paid a lower price the day before. And allocating shares to customers can increase loyalty. Airbnb (ABNB.O) did so last year. Doximity (DOCS.N) floated last week, reserving up to 15% of shares it sold for doctors who use its social network. It priced at $26 a share and now trades at $58.
For Robinhood, it's also a self-test of a new business line: It only announced its IPO Access platform in May. Clear Secure (YOU.N) used it for 1% of its float earlier this week, and Duolingo also plans to do so. If retail allocations catch on, that's a boon for the business.
Yet increasing the shares offered to retail investors, and especially customers, carries risks. Opening the underwriting pool to a wider group should mean a stock's IPO price will more closely match how it trades on opening day. That means the issuer leaves less money on the table.
But a higher IPO price may also mean worse long-term performance. About half of all stocks that float have negative returns in their first five years, according to data compiled by Jay Ritter, a finance professor at the University of Florida. Facebook (FB.O), for one, allocated roughly a quarter of its IPO to retail investors back in 2012. That was a headache for the company for a while, as its stock wilted afterward.
Of course, those that held on did very well indeed. Robinhood could face a double risk, though. If meme-stock-like enthusiasm comes into play both before and immediately after the IPO, the hangover could be worse. Boss Vlad Tenev may have to pick between maximizing the cash he raises and ensuring customers stay happy.
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- Robinhood Markets will allocate up to 35% of the shares in its initial public offering to retail investors, according to the Wall Street Journal on July 1, citing people familiar with the matter. The brokerage app wants people to buy shares using a new platform that offers access to IPOs.
- This week, the share trading platform gave its customers the opportunity to buy up to 1% of the stock offered in travel security app Clear Secure’s IPO. Language-learning app Duolingo said in a Securities and Exchange Commission filing on Monday that it plans to allocate some of its IPO shares via Robinbood.
- Robinhood’s own public IPO filing has been delayed by questions from regulators.
- Separately the Financial Industry Regulatory Authority, Wall Street’s industry watchdog, on June 30 fined a Robinhood unit $70 million for “systemic” failures, including in relation to systems outages in March 2020.
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