“Robinhood is democratising IPOs,” headlined the wildly successful retail investing app’s blog in May 2021: “IPO Access is here.” Ahead of its own blockbuster IPO, Robinhood launched a groundbreaking platform that would bring retail investors unprecedented levels of access to an initial public offering market that was typically reserved only for institutions. However, with just 1% of the app’s users taking Robinhood up with their own IPO’s participation, it appears that the brand spanking new feature may not be the level playing field that investors have been dreaming of.

The arrival of Robinhood’s very own dedicated IPO access portal was and still is an excellent bridge between retail investors and their institutional counterparts. Traditionally, institutional investors are largely favoured with IPO shares due to their superior spending power, but Robinhood’s IPO Access promised to change this market imbalance. 

“We’re starting to roll out IPO Access, a new product that will give you the opportunity to buy shares of companies at their IPO price, before trading on public exchanges,” Robinhood explained in their blog post. “With IPO Access, you can now participate in upcoming IPOs with no account minimums.”

However, despite Robinhood recording an average of 20 million active users at the beginning of 2021, only 301,573 chose to participate in the company’s IPO - representing just 1.3% of its total user base. 

Let’s take a look into why IPO Access has faced a slow start to life as Robinhood’s shiny new feature: 

Favouring The Institutions

Firstly, let’s explore the uneven playing field when it comes to investing in IPOs. When a company decides to launch an initial public offering, the underwriters and the company that issues the shares control the process. They can allocate share prices while the SEC doesn’t regulate the business decision of how shares are allocated. 

Although individual investors are beginning to find it easier to buy IPO shares online through various brokerage firms, there are still many reasons why the process is a difficult one. 

According to Maxim Manturov, head of investment research at Freedom Finance Europe, “historically, institutional investors get around 90% of all shares, with only around 10% left for retail trades. This is where allocation comes from: when the demand is high, the broker will have to reduce order amounts so as to at least partially fill all of them. The allocation ratio, meanwhile, depends on the investor trading activity and volume.”

The IPOs of most companies are typically offered to the public through an underwriting syndicate - which exists as a group of underwriters who purchase shares from the issuer to sell on. However, only a limited number of broker-dealers are invited into the syndicate as underwriters, and some may not even market themselves to individual investors. 

The underwriters also decide on the terms and structure of the IPO before trading starts - including the percentage of shares going to institutions and those going to individual retail investors. Most underwriters prefer to target institutional or rich investors in IPO distributions due to their ability to buy large volumes of shares in a single transaction - making the task of the underwriter far easier. 

The Limitations of IPO Access

One of the key issues with IPO Access is that it doesn’t quite offer retail investors the same freedom to buy, sell and hold their shares as their institutional counterparts. 

According to Benzinga, some Twitter users were taken by surprise when they saw a warning that trying to sell Robinhood’s IPO shares shortly after its floatation would incur a penalty. Robinhood’s IPO Access feature has a built-in guard against ‘flipping’ when shares in a company are sold before the 30-day waiting period is up. Any investors who chose to cash in their investment shortly after Robinhood’s debut would be unable to trade IPOs for the following 60 days. 

By actively preventing instances of IPO flipping, it means investors can miss out on the favourable first day ‘pops’ that some stocks get upon launch. Such restrictions don’t exist for institutional investors, although underwriters are required to avoid selling to those who may be more prone to flipping stocks due to the damage it can cause to a company’s floatation. 

Although Robinhood has strong rules in place to discourage investors from flipping stocks on IPO Access, harsher penalties have been put in place by certain competitors. SoFi is another brokerage that offers access to IPOs for retail investors, but the company hands out a $50 fee for any sales that take place within the first 120 days post-IPO. 

Robinhood’s much anticipated IPO got off to a rocky start, with prices sinking 8% on the first day of trading. With only 1.3% of investors utilising the app’s IPO Access portal to buy the initial public offering of the company, it appears that customers aren’t quite satisfied that the gap between retail and institutional access to IPOs has been sufficiently bridged. 

However, there’s plenty of evidence that IPO Access can forge successful use cases in the future. The portal has been used by the public to gain access to IPO shares for companies like Duolingo and F45 Training, with both companies performing admirably during its opening days of trading. 

Although IPO Access isn’t quite a platform that emulates the level of freedom and access institutional investors get when it comes to companies going public, Robinhood’s efforts have been successful in getting more retail investors in touch with the opportunity to buy shares in companies before they launch - without the need for minimum account balances. 

It may not be the tool to deliver a level playing field in the world of investing, but it represents an important stepping stone towards equality.