Retail Ready: Robinhood Sells IPO Shares to Retail Investors​


By Robyn Ma​

The Story

Robinhood, a popular app aimed at novice investors, has introduced a new platform, IPO Access, for clients to purchase shares in initial public offerings (IPOs) (Reuters; Robinhood). With a mission to “democratize” finance (Robinhood), the start-up is attempting to open this once Wall Street-exclusive field to newbie investors.

Large institutional banks and wealthy individuals usually gain access to a company’s shares before it goes public on a platform like Robinhood (CNBC). They can then benefit from an increase in share price. However, this means regular investors don’t get a cut of these initial gains. Data provider Dealogic found “the average IPO in the US had a 36% jump in share value on the first day of trading” (Forbes). Now, Robinhood is hoping to get retail investors involved in these early gains.

What It Means For Businesses And Law Firms

The traditional IPO process has been criticised for creating barriers that make it harder for private companies and retail investors to break into public markets (CNBC). Without the head-start afforded to large institutional investors, retail investors end up paying a higher price. In response, the US Securities and Exchange Commission (SEC) announced changes to allow companies to raise new capital through direct listings (CNBC). Robinhood seems to be responding to these criticisms too.

Robinhood’s growth is impressive. Since its inception in 2013, the platform has reached 13 million users and increased “its private-market valuation [...] to $11.2 billion” (CNN; Forbes). However, it has also been criticised for enticing amateur investors. Massachusetts securities regulators point to the “gamification” of trading (CNN), while others have argued that Robinhood “makes money based on clients trading addictively” (NBC; Forbes).

The platform made headlines recently when one Robinhood trader took his own life after mistakenly believing he was £75,000 in debt. Indeed, while the platform is intuitive, it obscures the intricacies involved with investment. Further, some argue that assessing the risk is best left to professional investors.

As Robinhood expands, it must navigate new regulations in response to increased scrutiny of the industry. Regulators and lawmakers will need to observe new developments, and consider the emerging debate around whether to unlock this lucrative domain for retail investors and devise ways to protect them, or to maintain the existing practice - permitting only professional investors, who can more accurately assess risk - to participate.

Equally, is Robinhood really different to Wall Street? In executing trades, many ‘professional’ investors are arguably involved in their own form of gambling, albeit through a less user-friendly platform. It should be interesting to see how start-ups like Robinhood continue to challenge traditional practices.

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