Robinhood, in Want of Money, Raises $1 Billion From Its Traders
Dealing with an onslaught of calls for on its money amid a inventory market frenzy, Robinhood, the net buying and selling app, stated on Thursday that it was elevating an infusion of greater than $1 billion from its current buyers.
Robinhood, one of many largest on-line brokerages, has grappled with an awfully excessive quantity of buying and selling this week as particular person buyers 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 extra money to its clearing facility to insulate its buying and selling companions from potential losses.
On Thursday, Robinhood was pressured to cease clients from shopping for plenty 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, often called the Depository Belief & Clearing Company.
Robinhood nonetheless wanted additional cash rapidly to make sure that it didn’t have to position additional limits on buyer buying and selling, stated two folks briefed on the state of affairs who insisted on remaining nameless as a result of the negotiations have been confidential.
Robinhood, which is privately held, contacted a number of of its buyers, together with the enterprise capital corporations Sequoia Capital and Ribbit Capital, who got here collectively on Thursday evening to supply the emergency funding, 5 folks concerned within the negotiations stated.
“It is a sturdy signal of confidence from buyers that can assist us proceed to additional serve our clients,” Josh Drobnyk, a Robinhood spokesman, stated in an electronic mail. Sequoia and Ribbit declined to remark.
Traders who present new financing to Robinhood will obtain further fairness within the firm. The buyers will get that fairness at a reduced valuation tied to the worth of Robinhood shares when the corporate goes public, stated two of the folks. Robinhood plans to carry an preliminary public providing later this yr, two folks briefed on the plans stated.
Robinhood’s emergency fund-raising is the newest signal of how buying and selling within the inventory market has been upended this week.
An internet military of buyers, who’ve been on a mission to problem the dominance of Wall Avenue, quickly bid up the worth of shares like GameStop, entrapping the big-money hedge funds that had guess towards the shares. A few of these particular person buyers have reaped large earnings, whereas not less than one main hedge fund needed to be bailed out after dealing with large losses.
Robinhood, which relies in Silicon Valley, has been key to empowering the net buyers. Adoption of the app has soared within the pandemic because the inventory market surged and folks took up day buying and selling within the void of different pastimes. The corporate has drawn in thousands and thousands of younger buyers who’ve by no means traded earlier than by providing no-fee buying and selling and an app that critics have stated makes shopping for shares really feel like a web based recreation.
With out charges, Robinhood makes cash by passing its buyer trades alongside to larger brokerage corporations, like Citadel, who pay Robinhood for the possibility to satisfy its buyer inventory orders.
In Might, Robinhood stated it had 13 million customers. This week, it turned the most-downloaded free app in Apple’s App Retailer, in accordance with Apptopia, an information supplier.
Critics have accused the corporate of encouraging folks to gamble on inventory market actions and danger large losses. Brokerages together with T. Rowe Worth, Schwab and Constancy have imitated Robinhood by decreasing their buying and selling charges to zero. Lots of them have been additionally hit by the crush of buying and selling this week.
Robinhood has had no bother elevating cash over the past yr, drawing $1.3 billion in enterprise capital backing and boosting its valuation to almost $12 billion. Its different buyers embrace the enterprise capital agency DST Capital, New Enterprise Associates, Index Ventures and Andreessen Horowitz.
But the corporate has confronted many points, together with fines from regulators for deceptive clients. Final March, it raised extra money after its app went down and left clients stranded and nursing large losses, resulting in a nonetheless ongoing lawsuit.
In current weeks, many on-line buyers have used Robinhood to make bets that pushed up the worth of GameStop, AMC Leisure and different shares that had been broadly shorted — or guess towards — by hedge funds. That modified on Thursday after the corporate curbed buyer buying and selling in the preferred shares.
“As a brokerage agency, we now have many monetary necessities,” Robinhood stated in a weblog submit Thursday. “A few of these necessities fluctuate primarily based on volatility within the markets and will be substantial within the present atmosphere.”
In protest, a whole bunch of hundreds of customers joined a marketing campaign to present Robinhood’s app the bottom one-star overview and drive the corporate’s score down. Some buyers additionally sued Robinhood for the losses they sustained after the corporate reduce off buying and selling in sure shares and several other lawmakers urged regulators to train extra scrutiny of the corporate.
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