Robinhood pushes on with IPO plans despite facing 49 GameStop lawsuits

Written by Ruby Hinchliffe
1st March 2021

Robinhood is gearing up to file confidentially for an initial public offering (IPO) as soon as this month. All the while, the stock trading app faces a mounting 49 GameStop-related lawsuits over trading restrictions.

According to Bloomberg, Robinhood has held talks with underwriters about filing “within weeks”.

The fintech’s imminent IPO plans, which are still subject to change, come after the $11.7 billion-valued firm raised funding last year designed to convert into equity in an IPO.

The first tranche will convert at a $30 billion valuation, or a 30% discount to the IPO, whichever is lower. Whilst the second tranche will convert to the lower of the 30% IPO discount, or a $33 billion valuation.

Lawsuits galore

In a regulatory filing last Friday, reported by The New York Times, Robinhood recorded “46 putative class actions and three individual actions”.

According to Bloomberg, Robinhood has held talks with underwriters about filing “within weeks”

This is in addition to the class action the brokerage is facing out of California over its day-long outages in March last year, in addition to the wrongful-death lawsuit levied by the parents of Alex Kearns, the teenager who committed suicide due to a fault in Robinhood’s app.

Alongside dozens of lawsuits, Robinhood is being investigated by two US regulators – the Financial Industry Regulatory Authority (Finra), and the Securities and Exchange Commission (SEC).

They are looking at how the brokerage displays options trades and cash positions to its customers. Finra, the body which protects US investors, is also still looking into the March 2020 outages.

So far, the fintech has paid $65 million to the SEC over deal disclosures. The investigation found the start-up failed to fully disclose its tactic of selling orders to high-speed trading firms.

In a bid to placate regulators, the California-based stock trading app hired two executives from Finra in January.

Raising $3.4bln

Earlier this year, Robinhood raised $3.4 billion in just a week from shareholders following January’s Wall Street stock market chaos. That’s more than the fintech has raised in its lifetime, which began back in 2013.

The scrambling capital raise followed days of complaints from customers and the eventual levy of class action lawsuits. The online brokerage, prior to its rapid mega-fundraising in early February, didn’t hold enough in reserves to meet “regulatory capital requirements”.

Vlad Tenev, Robinhood’s co-CEO, shared more on this to Elon Musk in a Clubhouse session, as reported by CNBC. He said the National Securities Clearing Corp requested a security deposit of $3 billion to back-up volatile stocks.

Robinhood negotiated $3 billion down to $1.4 billion. But it still meant the fintech needed to raise fresh capital fast to unlock restricted stocks.

Other trading app players in the US are generating huge capital interest. Tiger Global, a New York-based investor which poured $250 million into Robinhood in January, is reportedly leading a $200 million round in rival Public.com.

Business Insider reported the round, which has not yet closed. It will likely hurtle Public.com to a $1.2 billion post-money valuation. That’s quadruple what its valuation has sat at in the last two months.