Robinhood wants you to buy Robinhood stock on Robinhood

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Robinhood Markets Inc. wants its users to buy stock. The online brokerage’s own, that is.

The popular stock-trading app plans to set aside as much as 35% of shares in its coming initial public offering for individual investors, according to people familiar with the matter, a much larger retail allocation than in a typical deal. Robinhood wants people to sign up to buy the shares on its new platform that gives users access to IPOs before they start trading.

The Robinhood IPO is shaping up to be the biggest test yet of a notion that is gaining traction on Wall Street: The everyday investor should play a bigger role in the IPO market. Robinhood rivals SoFi Technologies Inc. and investing and social-networking app Public Holdings Inc. are launching their own IPO-access platforms to take advantage of the newfound power and enthusiasm of the everyday investor.

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The timing is no accident. The market for new listings is on track for its busiest summer in years. Companies have sold more than $190 billion in stock in U.S.-listed IPOs so far in 2021, according to data provider Dealogic, already exceeding 2020’s record total.

The new platforms are a new spin on an old idea that never really managed to take off. For all the sway that amateur investors have over meme stocks like GameStop Corp. and AMC Entertainment Holdings Inc., they have been largely shut out of the IPO party. Companies tend to allocate well under 10% to individual investors, according to brokers, and much of that supply is gobbled up by banks’ wealthy, well-connected clients. (There are some noteworthy exceptions: Facebook Inc. sold around 25% of its IPO shares to individual investors when it went public in 2012.)

Bankers tend to favor the big money managers they work with regularly, many of whom hold stocks long-term. Individual investors, the thinking went, are fickle and flighty.

Robinhood and its ilk aren’t so sure that maxim still holds true, especially in a market where online forums like Reddit’s WallStreetBets hold so much sway. Small-time investors are keeping hot stocks higher for longer, demonstrating their staying power. GameStop shares, for example, haven’t traded below $100 since late February; they started the year at under $20.

Issuers that ignore retail have "zero visibility" into what happens to their stock after they go public, said SoFi Chief Executive Anthony Noto.

"To ignore retail, I think, is a huge risk," he said.

Robinhood declined to comment on its IPO access platform.

Still, past efforts to court that audience have failed. A decade ago, a startup called Loyal3 Holdings Inc. began offering IPO shares to retail customers of companies, including Dave & Buster’s Entertainment Inc. and AMC, years before going viral. Despite opening more than 200,000 brokerage accounts and attracting an investment from basketball legend Shaquille O’Neal, Loyal3 never caught on.

"We were early," said Barry Schneider, who was Loyal3’s chairman and CEO. "Today, the difference is, the supposition that small individual investors aggregated carry a powerful voice is no longer hypothetical – it’s been proven."

Robinhood and SoFi have bigger user bases and more complete brokerage offerings, which executives hope will give them more leverage with banks and issuers. Robinhood alone has 18 million funded accounts. Both Robinhood and SoFi may penalize users who quickly sell their IPO shares by preventing them from participating in additional offerings for long periods.

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Mr. Noto said SoFi can gauge demand for IPO shares among its retail-investing customers at different prices and provide companies real-time information on average order sizes, other holdings in a given sector and average holding times.

"When I was the banker on the Twitter IPO, I would have loved to know" that information, said Mr. Noto, who worked on several such transactions as a tech banker at Goldman Sachs Group Inc.

This week, Chamath Palihapitiya allocated up to 5% of IPO shares in four new biotech-focused blank-check companies to individual investors via SoFi, which he took public through another blank-check company earlier this year.

Consumer-facing startups are especially eager to test the waters.

In addition to its own listing, Robinhood this week gave its users the chance to buy up to 1% of the shares in the IPO of Clear Secure Inc., the maker of an identity platform that lets travelers speed through airport security. Language-learning app Duolingo Inc. also plans to allocate shares via Robinhood when it goes public, the company said in a securities filing Tuesday.

A few weeks ago, FIGS Inc., a maker of scrubs and other medical uniforms, placed about 1% of its public offering with Robinhood users. The trading app’s focus on first-time investors with smaller account balances resonated with FIGS Co-Chief Executive Trina Spear: Most of the nurses and health care professionals FIGS serves earn modest incomes.

"The alignment in terms of our customer base and who they are serving was there," Ms. Spear said. FIGS shares have more than doubled off their IPO price.

Robinhood and SoFi still need to take care to educate consumers about the potential pitfalls of investing in companies without a proven record in the public markets. Brokerage firms are required to determine whether IPOs are suitable investments for their customers after taking into account factors like their income and risk tolerance.

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Robinhood users must acknowledge that IPOs "may be riskier than other investments due to lack of data and other factors," though they are not required to parse through more exacting disclosures. Robinhood has faced complaints for allowing unsophisticated investors to take risks they might not fully understand. The company has agreed to pay nearly $70 million to resolve a regulator’s allegations that the brokerage approved ineligible investors for risky trading strategies, among other things. Robinhood neither admitted nor denied the allegations.

The risks were on display in the March IPO of food-delivery company Deliveroo Holdings PLC. About 5% of the London offering was earmarked for individual investors through British investing startup PrimaryBid Ltd. After the first day of trading, those investors were sitting on a paper loss of 26%.

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