Facing a violent onslaught of demands for his money amid the stock market frenzy, Robinhood, the online trading app, said on Thursday that it was raising an emergency injection of more than $ 1 billion from its existing investors .
Robinhood, one of the biggest online brokers, struggled with an unusually high volume of trades this week, with individual investors accumulating stocks like GameStop. This activity put pressure on Robinhood, which has to pay customers who have money in the negotiations and, at the same time, deposit additional money in its clearinghouse to protect its business partners from potential losses.
On Thursday, Robinhood was forced to stop customers from buying a series of shares like GameStop, which were heavily traded this week. To continue operating, it used a credit line from six banks in the amount of $ 500 million to $ 600 million to meet the higher margin, or loan, needs of its stock trading clearinghouse, known as the Depository Trust & Clearing Corporation.
Robinhood still needed more money quickly to ensure that it did not have to put more limits on negotiations with customers, said two people informed about the situation who insisted on remaining anonymous because the negotiations were confidential.
Robinhood, which is a privately held company, contacted several of its investors, including venture capital firms Sequoia Capital and Ribbit Capital, which met Thursday night to offer the new financing, said five people involved in the negotiations.
“This is a strong sign of investor confidence that will help us continue to serve our customers,” said Josh Drobnyk, a spokesman for Robinhood, by email. Sequoia and Ribbit declined to comment.
Investors who provide new financing to Robinhood will receive additional capital from the company. Investors will obtain this equity in a discounted valuation linked to Robinhood’s share price when the company goes public, two people said. Robinhood plans to hold an initial public offering later this year, said two people informed about the plans.
Robinhood’s emergency fundraising is the latest sign of how stock market trading has changed this week.
An online army of investors, who were tasked with challenging the dominance of Wall Street, quickly raised the price of shares like GameStop, arresting the large hedge funds that had bet against the shares. Some of these individual investors made huge profits, while at least one large hedge fund had to be rescued after facing huge losses.
Robinhood, who is based in Silicon Valley, has been instrumental in empowering online investors. Adoption of the app skyrocketed in the pandemic as the stock market skyrocketed and people started trading in the void of other hobbies. The company has attracted millions of young investors who have never traded before, offering free trades and an app that critics say makes stock buying look like an online game.
Without fees, Robinhood makes money by passing on its clients ‘trades to larger brokers, such as Citadel, who pay Robinhood for the chance to fulfill his clients’ stock orders.
In May, Robinhood said it had 13 million users. This week, it became the most downloaded free app on Apple’s App Store, according to Apptopia, a data provider.
Critics accused the company of encouraging people to bet on stock market movements and risking huge losses. Brokers, including T. Rowe Price, Schwab and Fidelity, imitated Robinhood, reducing their trading fees to zero. Many of them were also hit by the crush of trade this week.
Robinhood had no trouble raising money last year, attracting $ 1.3 billion in venture capital and increasing his valuation to nearly $ 12 billion. Its other investors include venture capital firm DST Capital, New Enterprise Associates, Index Ventures and Andreessen Horowitz.
However, the company faced many problems, including fines from regulators for misleading customers. Last March, it raised more money after its app crashed and left customers stranded and suffering huge losses, leading to a lawsuit still in progress.
In the past few weeks, many online investors have used Robinhood to place bets that have pushed up the price of GameStop, AMC Entertainment and other stocks that had been widely sold – or against – by hedge funds. That changed on Thursday after the company restricted deals with customers on the most popular shares.
“As a broker, we have a lot of financial requirements,” Robinhood said in a blog on Thursday. “Some of these requirements vary based on the volatility of 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 rating and lower the company’s rating. Some investors also sued Robinhood for the losses they suffered after the company stopped trading certain shares and several lawmakers asked regulators to exercise more scrutiny over the company.