Robinhood offers customers early IPO access

LOS ANGELES — Robinhood disrupted another stock market norm — and took a big risk — by giving ordinary investors access to a huge slice of its initial public offering.

The popular online brokerage adopted the unusual step of allowing users of its trading app to buy up to a third of its IPO shares before the stock’s trading debut Thursday on the Nasdaq under the “HOOD” ticker symbol. Typically, only institutional investors and company insiders can buy shares in companies before they go public.

Early access can potentially give investors a big advantage if shares move higher once they debut. Between 2001 and 2020 the average U.S. IPO returned 14.5% from the offer price on day one, according to Renaissance Capital. So far this year, the jump is even greater, at 34%. For IPOS that have raised at least $100 million, the average first-day return this year is 25%.

But expanding early access beyond Wall Street insiders isn’t without risk, especially given that Robinhood is making available such a large chunk of its offering to users via its own trading platform. The move could backfire if many individual investors, often referred to as retail traders, flip their shares for a quick profit, rather than hold them, said Matt Kennedy, senior IPO market strategist at Renaissance Capital.

“The major downside, and the reason this is so unusual, is issuers typically place a great deal of value on the investment bank’s ability to place the shares with institutional, long-only investors who understand the business, believe in it and have done their homework,” Kennedy said. “Retail traders have more of a reputation of flipping, so this could result in higher volatility.”

The Menlo Park, California, company expects to offer up to $770 million worth of its shares to its customers.

The estimate is based on an offering price of $40 per share, the midpoint in a range of $38 to $42 per share, the company said a filing with the Securities and Exchange Commission last week.

All told, Robinhood is seeking a market valuation of up to $35 billion.