The same retail traders that made Robinhood a household name have now backed the platform into a corner. The recent surge in Reddit fueled trading has all but pushed the company to the very edge of regulatory compliance. Now faced with congressional scrutiny and numerous lawsuits, it seems the only thing that might rescue Robinhood is an IPO.
In a blog post, Robinhood claimed the trading restrictions were necessary given the "extraordinary circumstances" of the GameStop
In the meantime, lawmakers plan to put Robinhood's conduct under the microscope. Robinhood's CEO, Vlad Tenev, is set to testify at a February 18 hearing before the House Financial Services Committee. The hearing entitled "Game Stopped? Who Wins and Who Loses when Short Sellers, Social Media and Retail Investors Collide" will investigate any potential collusion between Robinhood and the hedge funds impacted by the Reddit trade.
Collusion aside, Robinhood has one key factor in its defense: collateral requirements. The late January surge put the platform over a barrel with the National Securities Clearing Corporation. The agency recently demanded that Robinhood raise 3 billion dollars to cover any potential losses incurred due to the "mementum" trade. Robinhood has since managed to raise 3.4 billion, far in excess of the NSCC's demands.
The additional capital seems all the more necessary for the platform as it braces itself for a future dominated by high volatile social media-fueled trading. At this point, an IPO seems to be the most logical way for Robinhood to raise funds necessary to meet liquidity requirements in the future. The recent GameStop craze makes Robinhood's need for public investment all the more urgent. By all accounts, the platform is sticking to its May timeline. However, Robinhood could accelerate this timeline by filing an IPO through a Special Purpose Acquisition Company. These companies raise the funding necessary for an IPO and then merge with a prospective company. Such a merger would spare Robinhood the regulatory pitfalls that typically accompany a traditional public offering.
Robinhood's struggles during the recent Reddit fiasco will likely stand as a warning for other like-minded platforms. Gone are the days when retail investors let their accounts slowly appreciate in a digital lockbox. The hordes of cash-rich 20 to 30 somethings have seen their ability to move markets with aggressive trading, and they seem to have no interest in stopping. Robinhood will likely survive its current legal battles. Its IPO will help cushion the company, which could prevent future trading freezes.
Still, Robinhood and the market as a whole find themselves in uncharted waters. What social media-driven storms are on the horizon is anybody's guess.
- 1. https://markets.businessinsider.com/news/stocks/robinhood-raises-additional-24-billion-reddit-daytrader-gamestop-amc-frenzy-2021-2-1030029079
- 2.https://www.theverge.com/2021/2/1/22254656/robinhood-gamestop-stonks-trade-freeze-class-action-lawsuits
- 3.https://www.politico.com/news/2021/02/01/robinhood-ceo-testify-maxine-waters-464491...
- 4.https://finance.yahoo.com/news/robinhood-other-drama-ipo-firm-050007256.html