Robinhood is slated to price its shares today before trading begins tomorrow, and yesterday it released a new investigation: the financial sector self-regulator is checking whether founders Vlad Tenev and Baiju Bhatt should be registered with them. Currently, the co-founders are not.
Is this bad? Maybe, I don’t know. I don’t work for the Financial Industry Regulatory Authority (FINRA), an organization you may remember from the historic fine it handed out against Robinhood — $70 million — for, among other things, the outages that occurred in March 2020. (about $12 ) million went to the people who were injured, and the rest went to FINRA, because that’s Wall Street, honey.) I’m a little less concerned about FINRA’s investigation than about how it was revealed: in an amended version of Robinhood’s prospectus.
The prospectus is the regulatory application that investors should read before deciding to put money into an IPO. It’s very long. If you want to find the exact reveals, I recommend CTRL+f (or CMD+f) for “on July 26, 2021”.
As part of its public plan, Robinhood is offering an unprecedented amount of its IPO to private investors before public trading starts tomorrow. Could be more than a third of his shares go to users of his app, who – as Robinhood also told us in its prospectus – are often first-time investors (more than half of its customers!). I watched the roadshow for those investors on Saturday and I didn’t get the impression that the presentation was for sophisticated investors. This is partly because Tenev wasted time on a question about his favorite planet, but also because some of the questions Robinhood chose to answer in the presentation were in the prospectus.
My impression now is that Robinhood expects its retail investors not to read the prospectus. That’s why putting the FINRA thing there has my eyebrows at my hairline. I know there are restrictions on what a company can say before it goes public, but the Securities and Exchange Commission allows: companies to communicate “factual company information” during the quiet period.
“I’m curious as to why this is coming out now,” said Robert Le, senior analyst at Pitchbook. “Why is it coming out on the eve of the IPO?”
CNN reported for the first time that Tenev, the CEO of Robinhood, and Bhatt, the company’s chief creative officer, were not registered with FINRA in February. FINRA has a rule about companies called broker-dealers that trade securities on behalf of their clients: their CEOs must be registered. But Tenev is the CEO of Robinhood Markets, the parent company, which is… not a broker-dealer. What is registered with FINRA is a subsidiary. In the February report, Robinhood told CNN that Tenev “does not directly control the FINRA-registered broker-dealer or clearing broker’s leaders” and “refused to say who does.”
Okay. It’s not clear to me that Tenev and Bhatt have required did something wrong here. For example, our Bitcoin-tormented boy, Jack Dorsey, is not listed among the registrants – although his company, Square, has an arm that allows investment, according to CNN. In the first report on Tenev and Bhatt, the registration issue was “a gray area,” Charles Whitehead, a law professor at Cornell Law School, told CNN. “If they’re the CEO of a shell company that does nothing but manage the broker-dealer, that’s a problem,” he explained.
So Square is not primarily concerned with investments; payments are basically bread and butter. With Robinhood, on the other hand, it seems that investment is the whole point. Tenev . also has comments made about Clubhouse (in an interview with Elon Musk!) about getting a call at 3 a.m. because he had to round up $3 billion to give to his clearinghouse.
I trust FINRA will resolve this. But no matter how the investigation is resolved, it doesn’t bolster my confidence that Tenev and Bhatt’s big talk about democratizing finance is serious. In fact, it underscores something else in the S-1: the difference in voting rights between Class A shares (what IPO investors get) and Class B shares, which the founders get. Class B holders get 10x the voting rights of Class A owners. In Robinhood democracy, everyone is equal, but – with apologies to George Orwell – some investors are more equal than others. Tenev and Bhatt didn’t discuss this in the roadshow, and I don’t think it was because the planet issue was more important.