Facing an onslaught of calls for on its money amid a inventory market frenzy, Robinhood, the net buying and selling app, mentioned on Thursday that it was elevating an infusion of greater than $1 billion from its present traders.
Robinhood, one of the most important on-line brokerages, has grappled with an awfully excessive quantity of buying and selling this week as particular person traders have piled into shares like GameStop. That exercise has put a pressure on Robinhood, which has to pay clients who’re owed cash from trades whereas posting more money to its clearing facility to insulate its buying and selling companions from potential losses.
On Thursday, Robinhood was compelled to cease clients from shopping for a quantity of shares, like GameStop, that have been closely traded this week. To proceed working, it drew on a line of credit score from six banks amounting to between $500 million and $600 million to satisfy greater margin, or lending, necessities from its central clearing facility for inventory trades, referred to as the Depository Trust & Clearing Corporation.
Robinhood nonetheless wanted additional cash shortly to make sure that it didn’t have to put additional limits on buyer buying and selling, mentioned two individuals briefed on the scenario, who requested to stay nameless as a result of the negotiations have been confidential.
Robinhood, which is privately held, contacted a number of of its traders, together with the enterprise capital corporations Sequoia Capital and Ribbit Capital, which got here collectively on Thursday night time to supply the emergency funding, 5 individuals concerned in the negotiations mentioned.
“This is a strong sign of confidence from investors that will help us continue to further serve our customers,” Josh Drobnyk, a Robinhood spokesman, mentioned in an e-mail. Sequoia and Ribbit declined to remark.
- Shares in GameStop, the online game retailer, have soared as a result of amateur investors, starting on Reddit, have bet heavily on shares of the company.
- The wave gained momentum in response to large hedge funds short selling GameStop stock — basically they were betting against the company’s success.
- The sudden demand has driven up the share price from less than $20 in December to around $300 on Monday. On paper, anyway.
- It’s not just GameStop. Amateur investors have backed other companies that many big investors had shunned, such as AMC and BlackBerry.
- This bubble around GameStop forced big investors to raise money to cover their losses, or dump shares of other companies.
Investors who provide new financing to Robinhood will receive additional equity in the company. The investors will get that equity at a discounted valuation tied to the price of Robinhood shares when the company goes public, two of the people said. Robinhood plans to hold an initial public offering this year, two people briefed on the plans said.
Robinhood’s emergency fund-raising is the latest sign of how trading in the stock market has been upended this week.
An online army of investors, who have been on a mission to challenge the dominance of Wall Street, rapidly bid up the price of stocks like GameStop, entrapping the big-money hedge funds that had bet against the stocks. Some of these individual investors have reaped huge profits, while at least one major hedge fund had to be bailed out after facing huge losses.
Robinhood, which is based in Silicon Valley, has been key to empowering the online investors. Adoption of the app has soared in the pandemic as the stock market surged and people took up day trading in the void of other pastimes. The company has drawn in millions of young investors who had never traded before by offering no-fee trading and an app that critics have said makes buying stocks feel like an online game.
Without fees, Robinhood makes money by passing its customer trades along to bigger brokerage firms, like Citadel, which pay Robinhood for the chance to fulfill its customer stock orders.
In May, Robinhood said it had 13 million users. This week, it became the most-downloaded free app in Apple’s App Store, according to Apptopia, a data provider.
Critics have accused the company of encouraging people to gamble on stock market movements and risk big losses. Brokerages including T. Rowe Price, Schwab and Fidelity have imitated Robinhood by lowering their trading fees to zero. Many of them were also hit by the crush of trading this week.
Robinhood has had no trouble raising money over the last year, drawing $1.3 billion in venture capital backing and lifting its valuation to nearly $12 billion. Its other investors include the venture capital firm DST Capital, New Enterprise Associates, Index Ventures and Andreessen Horowitz.
Yet the company has faced many issues, including fines from regulators for misleading customers. In March, it raised more money after its app went down and left customers stranded and nursing big losses, leading to a still ongoing lawsuit.
In recent weeks, many online investors have used Robinhood to make bets that pushed up the price of GameStop, AMC Entertainment and other stocks that had been widely shorted — or bet against — by hedge funds. That changed on Thursday after the company curbed customer trading in the most popular stocks.
“As a brokerage firm, we have many financial requirements,” Robinhood said in a blog post Thursday. “Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment.”
In protest, hundreds of thousands of users joined a campaign to give Robinhood’s app the lowest one-star review and drive the company’s rating down. Some investors also sued Robinhood for the losses they sustained after the company cut off trading in certain stocks and several lawmakers urged regulators to exercise more scrutiny of the company.