Robinhood knows the value of striking while the iron is hot. A day after the popular but controversial stock trading app agreed to pay $70m to settle regulatory allegations that it has misled customers, it dropped the paperwork for its long-awaited initial public offering.

The IPO prospectus is chock-full of eye-catching numbers that the Silicon Valley start-up is hoping to parlay into a $40bn-plus valuation.

Revenue more than tripled to $958m last year as stuck-at-home Americans passed their time stock trading. That explosive growth has continued in 2021. Revenue already topped $522m in the first quarter. A viral meme-stock and cryptocurrency trading boom helped the platform to more than double the number of funded accounts over the past 12 months to 18m.

But the filing also highlights just how vulnerable Robinhood’s business model is to regulatory scrutiny. For would-be investors, the biggest risk is the legal hits would keep on coming.

Last year the Securities and Exchange Commission fined Robinhood $65m over charges that it misled customers about its revenue sources. The regulator is now considering changes to rules around payment-for-order flow, whereby brokers send retail customer trades to market-making companies such as Citadel Securities or Virtu Financial in return for a fee.

Any changes could deal a big blow to Robinhood’s business model. As it does not charge clients a fee on making stock trades, the company makes the bulk of its revenue from payment-for-order flows. These accounted for about 63 per cent of Robinhood’s first quarter revenue. Cryptocurrency trading, which made up almost a fifth of the company’s transaction-based revenue during the period, is another area susceptible to regulatory changes.

Add to this Robinhood’s meagre profitability and the $40bn valuation the company is seeking looks steep. Assuming the app can double its revenue this year, that still implies a valuation of 20 times that. Charles Schwab, which made $3.3bn in profit last year against Robinhood’s $7m, trades on a ratio of just 12 times.

Robinhood’s plans to reserve up to 35 per cent of its IPO shares to retail investors could help it secure its lofty premium. But it also risks further public outcry from an army of unhappy buyers if the stock tanks on opening day.

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