Robinhood Warns of Meme-Stock Risk as Users Participate in IPO

(Bloomberg) -- Robinhood Markets Inc. basically created meme stocks. Now the popular trading app is warning investors that it could become one.

The reason -- outlined in its initial public offering prospectus Thursday -- comes down to the novice investors that love its easy-to-use platform and have driven frenzied trading in names like GameStop Corp. and AMC Entertainment Holdings Inc.

Robinhood plans to set aside 20% to 35% of its IPO shares for its own users, according to its filing with the U.S. Securities and Exchange Commission. That's an unusually high proportion. It means people who buy into the stock could be in for a bumpy ride, Robinhood said in the section of the filing outlining its IPO risks.

“Because we expect Robinhood customers to have the opportunity to participate in this offering through our platform, and given the broad consumer awareness and brand recognition of Robinhood, individual investors, retail or otherwise, may constitute a larger proportion of the investors participating in this offering than is typical,” Robinhood said. “These factors could cause volatility in the trading price of our Class A common stock.”

This begs the natural question: Why is Robinhood opening itself up this risk?

A lot of users were upset when Robinhood -- facing a margin call -- halted trading earlier this year of popular stocks causing some of them to book big losses. Now it is using the IPO to make amends with them by letting them participate, according to Peter Hanks, an analyst at DailyFX, a firm that provides foreign exchange trading and doesn't compete with Robinhood on equity or crypto trading.

“They're the foundation of the meme stock trading,” Hanks said. “I'm not too sure people with access to the IPO through the platform would be very interested.”