Popular stock trading platform Robinhood Markets Inc. has raised more than $1 billion overnight from existing investors, after a massive amount of trading this week strained the platform to its limits.
Barely 24 hours after Robinhood halted the purchase of GameStop stock due to the surge in trading volume in stocks, the platform raised funds as a means of infusion to shore up its balance sheet. It raised fresh equity to help manage the soaring demands and ease restrictions on the trading of stocks.
Trading platforms like Robinhood have to maintain deposit accounts at the clearing firms to finalize trades, since there is a significant gap between when investors book new positions in a stock and when their cash is actually exchanged for securities. According to the company, the buying of GameStop (GME) and AMC stocks was restricted because the firm was unable to meet the deposit requirements that it was anticipating.
Robinhood was reported to have contacted its investors, including Sequoia Capital and Ribbit Capital, both venture capital firms, which came together to offer the emergency funding on Thursday. It was revealed that investors who will provide new financing to Robinhood would be rewarded with additional equity in the company. They would receive that equity at a discounted value tied to the price of the shares of Robinhood when the firm would go public.
The $1 billion that was raised was after Robinhood had drawn down some of its credit lines to receive $500 million, to ensure it had the required capital to allow people to continue trading stocks. Robinhood CEO Vlad Tenev said that tapping the credit lines was a proactive measure, denying any allegations that it was a liquidity issue. “By drawing on our credit lines which we do all the time as part of normal day-to-day operations we get more capital than we can deposit with the clearinghouses and that will allow us to enable ideally more investing with fewer restrictions,” Tenev said.
Earlier, Robinhood had halted the purchase of certain stocks, including GameStop and AMC Entertainment, sparking a major controversy and outrage from business dealers. The trading platform is currently only allowing the selling of stocks, and would continue to “monitor the situation and may make adjustments as needed.
“To be clear, the decision was not made on the direction of any market maker we route to or other market participants,” Robinhood said in a statement.
