FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2021

NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial assets and liabilities measured at fair value on a recurring basis as of the date indicated below were presented on our unaudited condensed consolidated balance sheets as follows:


	December 31, 2020
(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents:
Money market funds	$	1,026,034	$	—	$	—	$	1,026,034
Cash and securities segregated under federal and other regulations:
U.S. Treasury securities	134,994		—		—		134,994
Other current assets:
Equity securities - user-held fractional shares	802,483		—		—		802,483
Equity securities - securities owned	3,222		—		—		3,222
Total financial assets	$	1,966,733	$	—	$	—	$	1,966,733

Liabilities
Accounts payable and accrued expenses:
Equity securities - referral program liability	$	695	$	—	$	—	$	695
Other current liabilities:
Equity securities - repurchase obligations	802,483		—		—		802,483
Total financial liabilities	$	803,178	$	—	$	—	$	803,178


	September 30, 2021
(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents:
Money market funds	$	4,006,138	$	—	$	—	$	4,006,138
Cash and securities segregated under federal and other regulations:
U.S. Treasury securities	50,000		—		—		50,000
Other current assets:
Equity securities - user-held fractional shares	1,530,971		—		—		1,530,971
Equity securities - securities owned	22,769		—		—		22,769
Total financial assets	$	5,609,878	$	—	$	—	$	5,609,878

Liabilities
Accounts payable and accrued expenses:
Equity securities - referral program liability	$	46	$	—	$	—	$	46
Other current liabilities:
Equity securities - repurchase obligations	1,530,971		—		—		1,530,971
Total financial liabilities	$	1,531,017	$	—	$	—	$	1,531,017

We measure our cash equivalents, securities segregated under federal and other regulations, equity securities owned by us for the promotional stock referral and fractional shares programs, and user-held fractional shares at fair value. Repurchase obligations in connection with our fractional shares program and equity securities that were awarded to our users as a part of our promotional stock referral program but had not been claimed as of December 31, 2020 and September 30, 2021 are also measured at fair value. We have evaluated the estimated fair value of financial instruments using available market information such as quoted market prices for the same instrument in active markets. Such instruments are classified within Level 1 of the fair value hierarchy.

During the nine months ended September 30, 2021, we did not have any transfers in or out of Level 3 assets or liabilities.

Convertible Notes and Warrant Liability

In February 2021, we issued two tranches of convertible notes (the “convertible notes”) and granted to each purchaser of the Tranche I convertible notes a warrant to purchase equity securities (the “warrant liability”) - see Note 12 for more information. We have elected the fair value option for both tranches of the convertible notes as we believe it best reflects their underlying economics. Under the fair value option, the convertible notes are initially measured at their issuance date estimated fair value and subsequently remeasured at their estimated fair value at the end of each reporting period. Upon the closing of the IPO, all of our outstanding convertible notes and warrants were reclassified from liability to equity. See Note 12 for more information.

For the three and nine months ended September 30, 2021, we recorded expense due to changes in fair value of $27.8 million and $1,918.6 million for the convertible notes in our unaudited condensed consolidated statements of operations, none of which is attributable to the change in the instrument-specific credit risk. We have elected to present the component related to accrued interest in the change in fair value of convertible notes and warrant liability.

For the three and nine months ended September 30, 2021, due to changes in fair value, we recorded income of $2.5 million and expense of $127.1 million for the warrant liability in our unaudited condensed consolidated statements of operations.

The following table sets forth a summary of the changes in the estimated fair value of our convertible notes and warrant liability:


(in thousands)	Convertible notes		Warrant liability
Beginning of period, January 1, 2021	$	—	$	—
Issued during the period	3,299,031		252,944
Change in fair value	1,918,565		127,092
Reclassifications to equity	(5,217,596)		(380,036)
End of period, September 30, 2021	$	—	$	—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details