has given away free shares, but that comes at a cost to the companies behind those shares — and some of them want Robinhood to foot the bill. It’s another example of how new trends in financial services sometimes clash with practices designed for an older way of doing business.
Robinhood (ticker: HOOD) is giving away free shares to new users when they sign up for the brokerage app, or to existing users who refer friends. Robinhood is paying the cost of the stock — and given the company’s extremely rapid user growth and relatively low customer acquisition costs, it seems like a smart promotion. But there is another bill that is due based on those transactions. When brokers send proxy statements on behalf of companies, the companies reimburse brokers for those fees.
According to a Wall Street Journal report, costs are starting to mount for some companies, prompting the Securities and Exchange Commission to step in. A company that spoke out about the problem is
(CPRX), which said it had to pay more than $200,000 last year and may have to pay even higher fees this year.
“Catalyst believes there are likely plenty of companies facing the same problem, and the cost of distributing materials to small shareholders under these circumstances is hefty and unreasonable,” CEO Patrick McEnany wrote in a June 9 letter to the SEC. Catalyst’s shareholder base rose to 280,000 last year from 25,000 the year before, and proxy costs rose to $234,000 from $12,500, the Journal noted.
The New York Stock Exchange received approval from the SEC this month to ban brokers from requesting refunds from companies for shares they’ve been given for free. Robinhood is not a member of the NYSE, but the rule could be extended — the Journal reports that other companies want the Financial Industry Regulatory Authority, or Finra, to make it an industry-wide standard.
Robinhood added 7.4 million funded accounts in 2020 and ended the year with 12.5 million. An additional 10 million were added in the first six months of this year. When asked how much it would cost Robinhood to fund all proxy fees, the company didn’t have an immediate answer. Robinhood closed the second quarter with more than $5 billion in cash on its balance sheet, up from $1.4 billion at the start of 2021.
Robinhood shares fell 3% on Wednesday but are up 13% since the start of the week — the latest whirl in what was a volatile first month of trading.
In a statement, Robinhood said: “We do not expect the redemption waiver to have a significant impact on us, even if it were passed by other regulators. Customers love our free stock program and we think it fits our bill perfectly. mission to democratize finance for all.”
The problem can have a particularly large impact on companies whose stock prices per share are relatively cheap. While Robinhood says new users can receive free shares worth up to $225, about 98% of customers get shares worth between $2.50 and $10.
Stocks with low dollar values are not always small companies –
Sirius XM Holdings
(SIRI), a $25 billion company, trades for $6.34 – but it often is. Catalyst, with a market cap of $560 million, trades at $5.60.
(MRO), another company that has said it sees higher proxy-related costs, is worth $9 billion and trades at $11.62, but mostly traded below $10 last year. Shareholder base is down nearly 32 times in 2020 increased, raising proxy costs 25-fold, even as the company faced financial difficulties due to the pandemic.
Finra said it was reviewing the SEC’s decision, but declined to comment further.
Write to Avi Salzman at email@example.com