Robinhood is scheduled to price its stock today before trading begins tomorrow, and yesterday, it disclosed a new investigation: the finance industry’s self-regulator is checking to see whether founders Vlad Tenev and Baiju Bhatt should be registered with them. Currently, the co-founders aren’t.
Is this a big deal? Maybe, I don’t know. I don’t work at the Financial Industry Regulatory Authority (FINRA), an organization you may remember from the historic fine it leveled against Robinhood — $70 million — for, among other things, the outages that took place in March 2020. (About $12 million went to the people who were harmed, and the rest went to FINRA because that’s Wall Street, baby.) I am somewhat less concerned with FINRA’s investigation than I am with how this was disclosed: in an amended version of Robinhood’s prospectus.
The prospectus is the regulatory filing investors are encouraged to read before they decide to put money into an IPO. It is very long. If you want to find the exact disclosures, I suggest CTRL+f (or CMD+f) for “on July 26, 2021.”
As part of its go-public plan, Robinhood is offering an unprecedented amount of its IPO to retail investors before the public trading starts tomorrow. Maybe more than a third of its shares will go to users of its app, who — as Robinhood has 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 did not 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.
I am now under the impression that Robinhood expects its retail investors aren’t reading the prospectus. That’s why putting the FINRA thing in 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 about “factual business information” during the quiet period.
“I’m curious about why this is coming out now,” says Robert Le, a senior analyst at Pitchbook. “Why is it coming out on the eve of the IPO?”
CNN first reported that Tenev, Robinhood’s CEO, and Bhatt, the company’s chief creative officer, weren’t registered with FINRA in February. FINRA has a rule about firms, called broker-dealers, that trade securities on behalf of their customers: 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 manage the FINRA-registered leaders of the broker-dealer or clearing broker” and “declined to say who does.”
Okay. It’s not clear to me that Tenev and Bhatt have necessarily done anything wrong here. Our Bitcoin-addled boy, Jack Dorsey, isn’t listed among the registered, for instance — even though his company, Square, has an arm that allows investments, according to CNN. In its initial report on Tenev and Bhatt, the registration concern was “a gray area,” Charles Whitehead, law professor at Cornell Law School, told CNN. “If they are the CEO of a shell company that does nothing more than manage the broker-dealer, that’s an issue,” he explained.
So Square isn’t primarily in the business of investments; payments are the bread and butter, really. With Robinhood, on the other hand, it kind of seems like investments are the entire point. Also, Tenev has made comments on Clubhouse (in an interview with Elon Musk!) about getting a call at 3AM because he needed to round up $3 billion to give to his clearinghouse.
I trust FINRA will sort this out. But however the investigation resolves, it doesn’t strengthen my confidence that Tenev and Bhatt’s big talk about democratizing finance is serious. In fact, it underlines something else in the S-1: the difference in voting rights between Class A stock (what IPO investors get) and Class B stock, which is what the founders get. Class B holders get 10x the voting rights of Class A owners. In the 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 question was more important.