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Controversy-ridden Robinhood IPO: Will it reach $40 billion pie-in-the-sky valuation?

6 July 2021

Those old and wizened enough to remember the days when listing a company on a major stock market in a Tier 1 financial markets capital such as New York or London would require belt-and-braces due diligence by armies of auditors will likely be looking with furrowed brow on today's listings. The upright, criteria-led actuaries, who were viewed by sneering City traders in the 1990s as 'people who think accountancy is exciting' have given way to skateboard-riding hipsters with facial topiary that would make Tom Hanks reconsider his appearance in Castaway.

There was a time when publicly listed companies had to maintain an absolutely immaculate copybook, and could not list, or remain listed on prestigious exchanges if even the slightest blip in performance or risk-orientated issue was highlighted, but those days are rapidly changing. Given the NYSE, NASDAQ or London Stock Exchange's historically stringent monitoring of all of its listings, the new direction of bold-as-brass proposed IPOs is a change of direction entirely.

Robinhood is the latest, the company which has been at the center of many lawsuits ranging from North American regulator FINRA having accused Robinhood of allowing some users to make riskier trades than they were perhaps ready for along with system outages leading to a $70 million fine, to litigation from the family of Alex Kearns who committed suicide over a perceived $730,000 loss on a trade, leading him into a highly distressed mental state when he was unable to communicate with anyone at the company.

Despite these litigious episodes and many others, Robinhood is forging ahead with its IPO on NASDAQ, from which it intends to raise an astonishing $40 billion.

Whether this figure will be realized or not of course is pure speculation and given the gung-ho nature of Robinhood's core activities which have landed it in civil litigation and regulatory lawsuits, the estimated figure, which came from within, could be as disruptive as the company itself. Aside from the lawsuits and negative coverage over recent months, Robinhood admitted late last week that it cannot assure its investors that issues arising from meme stock trading won't affect it again. In January, during the Reddit subgroup-driven GameStop short, Reddit lost $1.4 billion and, along with a few other brokerages and trading houses, froze its customers out of their accounts.

The company then ceased the trading of certain meme shares due to increased capital requirements from its clearing houses. Despite raising north of $3.4 billion in a few days to shore up its balance sheet, the brokerage limited trading of GameStop, AMC Entertainment and other Reddit darlings.

"We cannot assure that similar events will not occur in the future,” Robinhood said in its S1 filing to the Securities and Exchange Commission, yet the NASDAQ IPO is still currently allowed to prevail.

As far as NASDAQ itself is concerned, the focus is on financial performance with regard to the Robinhood listing, and the firm says that during the year ended December 31, 2020, as compared to the year ended December 31, 2019, tot revenue grew 245% to $959 million, up from $278 million which accompanied a recorded net income of $7 million, compared to a net loss of $107 million the previous year, and adjusted EBITDA was $155 million, compared to negative $74 million in 2019.

These are remarkable figures, however there are two factors to consider here, the first being the controversial nature of Robinhood becoming a listed company despite its chequered reputation and the second being the difference in approach from NASDAQ when assessing companies to allow listing. It appears that as long as they meet the capital adequacy and balance sheet requirements, it's all systems go.

Goldman Sachs and J.P. Morgan are acting as joint lead book-running managers for the proposed offering. Barclays, Citigroup and Wells Fargo Securities are acting as active book-running managers for the proposed offering, and the IPO, if it proceeds, will be made only by means of a prospectus.

Currently there is no indication as to whether it will proceed, and there is speculation regarding whether pricing will be available, but we will keep our eyes peeled.

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