Aug 3, 2021 - Economy

Robinhood's IPO came amid a regulatory storm

Photo collage of a gavel and a dollar bill.

Illustration: Shoshana Gordon/Axios

Robinhood, best known for its popular no-fee stock trading app, went public last Thursday while facing an unusually large legal and regulatory storm.

Why it matters: While some challenges will likely resolve, others could seriously maim the company, forcing it to right its business ship under the scrutiny and pressures of the public markets.

The big picture: The Silicon Valley company has already settled various regulatory charges and faced questions from Congress, but there’s more ahead, including a probe into the fact that Robinhood’s founders aren't licensed brokers.

Risk radar:

  • "Payment for order flow," which made up 81% of Robinhood's 2021 Q1 revenue, is being examined by regulators and lawmakers alike. If banned, it could make it much harder for the company to keep offering no-fee trading.
  • Cryptocurrencies, which generated 17% of Robinhood's transaction revenue, still largely live in a regulatory gray area in the U.S.

What they’re saying: "Some of these issues may be dustups, but some may be fundamental challenges to the company," Chester Spatt, a Carnegie Mellon University professor and former chief economist at the U.S. Securities and Exchange Commission, tells Axios.

The best case scenario: Airbnb.

  • The home-sharing company, which went public last fall, has battled regulation of its main business in various municipalities around the world.
  • While some fights have truly threatened its presence in important markets, the company's business has fared quite well — even in the face of a long, global pandemic that halted much of our travel.
  • "Gig economy" companies like Uber, Lyft and DoorDash have also managed to weather a slew of regulatory challenges to their business models during and after their respective IPOs.

The worst case scenario: Whatever is currently happening to U.S.-listed Chinese tech companies.

  • Beijing has been cracking down on a number of its big and successful tech companies like Ant Group and, more recently, ride-hailing giant Didi, which is in hot water for going ahead with its IPO despite regulatory objections.
  • It’s reportedly considering closing a legal loophole that’s allowed companies in certain sectors — that are normally barred from taking foreign investment — to tap into the U.S. capital pool by going public stateside.
  • Beijing also recently unveiled new laws that bar education businesses from earning profits, raising capital or going public — dashing the IPO hopes of several of its edtech companies.

The bottom line: Government scrutiny is not to be taken lightly.

Go deeper