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Robinhood IPO Highlights Value, Controversy: Stock Indicated To Open at $38

From a Stanford University dorm room idea to a $32 billion Nasdaq IPO, Robinhood co-founders Vlad Tenev and Baiju Bhatt continue to challenge Wall Street's grip on the retail investor.

Robinhood  (HOOD) - Get Robinhood Report shares will begin trading on the Nasdaq Thursday after the online brokerage firm priced its hotly-anticipated IPO amid increased scrutiny from regulators and criticisms of its business model. 

Robinhood sold 55 million shares at $38 each, the lower end of its $38 to $42 target, raising $2.1 billion and valuing the group -- and its 21.3 million monthly active users -- at around $31.8 billion. Early indications suggest the shares will open at or below that $38 level. 

The pricing values Robinhood at around 15 times its 2021 revenue "run rate", which is based on a first quarter tally of $522 million. However, given that active users have risen 83% since the end of December, investors could expect to see faster revenue growth, and possibly a higher multiple, in the months to come.

Either way, it's an astonishing success for co-founders Vlad Tenev and Baiju Bhatt, former Stanford University roommates who developed a platform idea in 2013 that has captured both the current retail trading zeitgeist while luring one of the most valuable properties away from Wall Street giants: young investors. 

Each sold around $50 million worth of shares in the group they founded, and will retain around 65% of the voting rights of the listed company. 

But it's also come with a cost: Tenev, whose personal cellphone was seized by federal investigators working for the U.S. Attorney’s Office for the Northern District of California earlier this month, is also facing probes related to his registration with the Financial Industry Regulatory Authority (FINRA).

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Robinhood is also facing a joint FINRA/Securities and Exchange Commission investigation into whether its employees traded shares in fast-moving meme stocks such as GameStop  (GME) - Get GameStop Corp. Class A Report prior to imposing controversial restrictions on customers in late January.

Last month, FINRA fined Robinhood $57 million earlier this week, and ordered it to pay a further $12.6 million in damages, after it deemed the group caused "significant" harm to some its customers in showing them incorrect account balances.

Last year, Alexander Kearns committed suicide after he thought he'd run up massive losses in a Robinhood trading account. Kearns, 20, was a student at the University of Nebraska. He thought he'd generated losses of more than $730,000. He had not.

Robinhood said it generated $959 million in revenues last year, a 245% increase from 2019, and noted it has 17.7 million active users on the platform with aggregate assets of around $81 billion.

However, more than three quarters of that revenue total came from larger brokerage firms in the form of so-called payment for order flows (PFOFs), a controversial practice that has caught the attention of the SEC. 

"Robinhood explicitly offered to accept less price improvement for its customers in exchange for receiving higher payment for order flow for itself," SEC Chairman Gary Gensler said last month in a speech during which he addressed by 'conflict of interest concerns' and the 'gamification' of stock trading on retail brokerage platforms.

"As a result, many Robinhood customers shouldered the costs of inferior executions; these costs might have exceeded any savings they might have thought they’d gotten from zero commission trading."

Robinhood itself noted that new regulations on PFOFs could trigger "significant changes to our business model", while also detailing a series of regulatory and legal challenges linked to everything from anti-money laundering and cybersecurity to allegations of unethical conduct and lapses in transparency.