Robinhood laid the groundwork for its highly anticipated IPO on Thursday, as it disclosed in a document the rapid growth of users of its trading app and also marked a series of investigations by prosecutors and regulators.

According to Reuters, the company was under scrutiny after this year’s trading frenzy for so-called meme stocks such as GameStop, and its goal is to have an IPO valuation of more than US$40 billion (approximately Rs 298.9 billion).

Robinhood’s IPO document details for the first time how the trading frenzy that swept amateur investors drove its revenue growth fourfold from January to March, and how its rapid expansion paid the price.

The company reported that after borrowing US$3.5 billion (approximately Rs 2,615 crore) through convertible bonds to support the wave of trading orders during the period when several stocks rose, it had a net loss of US$1.4 billion (approximately Rs 104.6 crore) during the period. Shorted by hedge funds and supported by individual investors in online chat rooms including Reddit’s WallStreetBets.

Its handling of the meme stock frenzy, malfunctions, and subsequent trading restrictions have aroused the anger of many users and American lawmakers.

Legal authorities and regulators are already investigating Robinhood’s aggressive marketing to investors and how it can profit from trading orders, and their scrutiny has doubled.

The IPO documents show that the investigation by the California Attorney’s Office even led to the issuance of a search warrant on the mobile phone of Robinhood co-founder and CEO Vlad Tenev.

A spokesperson for the U.S. Attorney’s Office of Northern California declined to comment.

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Earlier this week, the Menlo Park, California-based company agreed to pay a fine of 70 million U.S. dollars (approximately 5.2 billion rupees) as part of a settlement with the U.S. financial regulator, which accused the company of failing Able to review its customers and implement risk control.

The documents show that Robinhood and CEO Tenev have been subpoenaed and have received requests for information from various government agencies including the US Department of Justice and the US Securities and Exchange Commission.

The company was also sued this year by the family of a 20-year-old stock trader who committed suicide on the grounds that the app’s “misleading communication” caused their son to panic about what he mistakenly believed was huge market losses.

Most of Robinhood’s revenue comes from “Order Flow Payment”. Under this approach, brokers collect fees from market makers to route transactions to them.

Critics believe that this creates a conflict of interest and incentivizes brokers to send orders to the person who pays the most, which may not necessarily be the best deal for customers. Regulators are reviewing Robinhood.

In the first quarter of this year, 59% of Robinhood’s revenue came from four market makers. The company said its revenue last year increased to 959 million US dollars (approximately 71.7 billion rupees).

Robinhood will be profitable in 2020, reporting a net income of 7 million U.S. dollars (approximately 500 million rupees), and a loss of 107 million U.S. dollars in 2019.

As of March 31, 2021, the company holds approximately US$12 billion (approximately Rs 89,690 crore) of cryptocurrency assets in custody, a 23-fold increase from a year ago. During the same period, more than 9.5 million customers traded approximately US$88 billion (approximately Rs 6,578 billion) of cryptocurrency on Robinhood’s platform.

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The app of choice for young investors

Robinhood’s trading app was founded in 2013 by roommates Tenev and Baiju Bhatt of Stanford University, making it easier for the public to trade securities and exciting a generation of retail traders.

The platform’s easy-to-use interface makes it the first choice for young investors trapped at home due to the pandemic, and its popularity has skyrocketed in the past 18 months.

Robinhood can be said to be a breakthrough fintech startup of this generation, which has attracted the imagination of Silicon Valley’s largest investors, who invested billions of dollars in the company. It challenges the old rules of investment by eliminating the role of financial adviser.

“Some authority figures laughed at individual holdings and said that people should only invest in passively managed funds through advisors. We reject this. We think it is important to be able to directly own the stocks of companies you like, without any intermediaries,” Tenev and Bhatt said. Said in the IPO document.

Robinhood said that underwriters will retain 20% to 35% of their Class A shares and sell them to customers through its IPO Access function. The platform was launched in May to provide retail investors with opportunities to snap up IPO shares.

Since its launch, Robinhood has raised more than US$5.5 billion (approximately Rs 41,125 crore) from investors, including Ribbit Capital, ICONIQ, Andreessen Horowitz, Sequoia Capital, Index Ventures and New Enterprise Associates.

According to people familiar with the matter, its valuation nearly tripled in the last year alone, and the February financing valued the company at approximately US$30 billion (approximately Rs 2,243.25 billion).

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This online broker plans to list on the Nasdaq under the symbol “HOOD”.

Goldman Sachs and JPMorgan Chase are the lead underwriters of the offering.

© Thomson Reuters 2021

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