Robinhood is disrupting another stock market norm — and taking a big risk — by giving ordinary investors access to a huge slice of its initial public offering.
The popular online brokerage is taking the unusual step of allowing users of its trading app to buy up to a third of its IPO shares before they begin trading on the Nasdaq Thursday under the “HOOD” ticker symbol. Typically, only institutional investors and company insiders can buy shares in companies before they go public.
Early access can potentially give investors a big advantage if shares move higher once they debut. Between 2001 and 2020 the average U.S. IPO returned 14.5% from the offer price on day one, according to Renaissance Capital. So far this year, the jump is even greater, at 34%. For IPOs that have raised at least $100 million, the average first-day return this year is 25%.
But expanding early access beyond Wall Street insiders isn’t without risk, especially given that Robinhood is making available such a large chunk of its offering to users via its own trading platform. The move could backfire if many individual investors, often referred to as retail traders, flip their shares for a quick profit, rather than hold them, said Matt Kennedy, senior IPO market strategist at Renaissance Capital.
“The major downside, and the reason this is so unusual, is issuers typically place a great deal of value on the investment bank’s ability to place the shares with institutional, long-only investors who understand the business, believe in it and have done their homework,” Kennedy said. “Retail traders have more of a reputation of flipping, so this could result in higher volatility.”
The Menlo Park, California, company expects to offer up to $770 million worth of its shares to its customers. The estimate is based on an offering price of $40 per share, the midpoint in a range of $38 to $42 per share, the company said a filing with the Securities and Exchange Commission last week. All told, Robinhood is seeking a market valuation of up to $35 billion.
While giving individual investors a shot at pre-IPO shares is unusual, there have been some high-profile examples in recent years.
Ride-hailing apps Uber and Lyft gave their drivers a way to buy IPO shares, while online marketplace Etsy let its users get a piece of its IPO. Some companies also elect to go public via what is known as a direct listing. That’s where a company sells its shares to the public without involving underwriters. So, essentially everyone is on equal footing.
Robinhood’s approach stands out mainly because it is setting aside up to 35% of the IPO shares for its users. That’s the largest portion by far of pre-IPO shares to be designated for retail investors in an underwritten offering, Kennedy said.
Robinhood recently rolled out IPO Access, a platform that allow users to get in early on IPOs. The first such IPO made accessible to Robinhood users was Figs’ stock market debut in May. Shares in the online scrubs seller soared 36% in their first day of trading.
Robinhood users interested in buying shares of the company via its platform must sign up for the IPO Access feature. Once there, they place a “conditional offer to buy,” or COB, and say how many shares they hope to purchase. That conditional offer doesn’t become an official order until the IPO is priced, likely Wednesday night.
Robinhood has warned that users of IPO Access may get the full number of shares they want, or a partial amount, or none at all, depending on demand and other factors.
Robinhood is discouraging users from flipping shares they buy through its IPO platform. The company warns that users who sell IPO shares within 30 days of the IPO will be restricted from buying shares in IPOs for 60 days.
That may explain the two-pronged approach Robinhood user Allen Tran of New York is taking.
The 23-year-old, who began using Robinhood in 2016 and hosts online communities of investors, says he has signed up for Robinhood’s IPO platform and intends to buy shares in the company and hold them “for a very long time.” Tran also plans to use another trading platform to buy shares in Robinhood once they make their debut and then “scalp,” or sell those right away to profit on what he expects will be a big first-day pop in the stock.
“I’m going to watch the stock rally with hype, then I’m going to get out relatively quickly, banking my profits,” Tran said.
And if the stock should open below its offering price?
“I would be very, very surprised if that happens,” he said. “If that does happen, that just means that I will be able to buy more shares with the same amount of capital.”