The Real Reason They Rigged the Biggest IPO in History

SUMMARY

Joe Brown, a former stock broker and early investor in XAI, analyzes the unprecedented rule changes impacting upcoming IPOs from companies like SpaceX, OpenAI, and Anthropic. He highlights the implications for retail investors, index fund flows, and the potential risks of participating in these historic offerings.

MAIN POINTS

• The IPO process is explained using Saudi Aramco as an example, illustrating how companies sell only a portion of their shares to the public. [1:00]
• Recent IPOs like Robinhood and Coinbase experienced initial price surges followed by dramatic declines after lockup periods ended. [5:00]
• SpaceX's IPO will feature an unprecedented lockup structure, allowing early investors to sell significant portions of their shares soon after the IPO. [9:00]
• SpaceX will be included in the Nasdaq 100 within 15 trading days, causing massive index fund inflows and re-weighting among major tech stocks. [12:01]
• Nasdaq will apply a float multiplier to SpaceX's small public float, artificially increasing index fund demand for its shares. [16:02]
• Elon Musk and major investors are subject to longer lockups, but the IPO structure primarily benefits early investors seeking exits amid a surge in IPO activity. [18:02]

DETAILED ANALYSIS

Several of the largest initial public offerings (IPOs) in history are set to take place, with companies such as SpaceX, OpenAI, and Anthropic preparing to go public. These IPOs are notable not only for their size but also for significant changes in the rules governing how shares are sold and included in major stock indexes. The largest IPO to date was Saudi Aramco, which raised $38 billion and achieved a $2.4 trillion market capitalization.

Upcoming IPOs, particularly SpaceX, are expected to raise even more capital—around $75 billion—though with a slightly lower total market cap than Aramco. This makes the SpaceX IPO the largest in terms of funds raised, but not in overall company valuation, as it will still trail tech giants like Nvidia, Apple, and Microsoft.

The IPO process involves a company selling a portion of its shares to the public, not the entire ownership. This allows the company to raise capital for expansion while retaining significant control. Recent high-profile IPOs, such as Robinhood and Coinbase, followed a common pattern: an initial surge in share price driven by retail enthusiasm, followed by sharp declines once early investors and insiders were allowed to sell after the lockup period expired.

Robinhood's share price, for example, fell 92% from its peak, and Coinbase experienced a similar drop. Some companies, like Rivian, have yet to recover from these declines, highlighting the risks for retail investors who attempt to time the market by buying at the IPO and selling at the top.

SpaceX's IPO will feature a unique lockup structure. Early investors will be able to sell up to 20% of their holdings shortly after the first earnings report, with additional shares becoming available for sale if the stock price rises significantly. The lockup schedule is staggered, allowing incremental selling at set intervals and after subsequent earnings reports.

This approach is designed to avoid the typical post-lockup price collapse by distributing insider selling over time, potentially reducing volatility and the likelihood of a sharp price drop. However, this also means that retail investors hoping for a rapid price increase may not see the typical 'pop' associated with hyped IPOs, as insider selling could suppress upward momentum.

A major change involves how quickly SpaceX will be included in major indexes like the Nasdaq 100. Traditionally, new IPOs are required to 'season' for several months before being added to indexes, but SpaceX will be included within 15 trading days. This rapid inclusion will force index funds and passive investment vehicles to buy large quantities of SpaceX shares, redirecting capital from other major tech stocks.

However, because the total value of shares available to the public (the float) is only about $75 billion—less than 3% of the company's market cap—there is a risk of artificial price inflation due to the imbalance between demand from index funds and the limited supply of shares.

To address this, Nasdaq will apply a float multiplier, effectively pretending that a larger percentage of SpaceX shares are available for trading. This adjustment allows index funds to allocate more capital to SpaceX than the actual float would permit, further increasing demand for the limited shares. While this could drive prices higher, the staggered lockup structure enables early investors to sell into this demand, potentially stabilizing prices but also facilitating significant exits for insiders.

Notably, Elon Musk and other major investors are subject to longer lockup periods, remaining unable to sell for at least 366 days. The structure of the IPO and the associated rule changes appear designed to maximize capital raised for SpaceX and provide liquidity for early investors, rather than for Musk himself. The surge in IPO activity also coincides with historical patterns where increased IPOs often precede economic downturns, suggesting that retail investors should exercise caution.

The combination of new index rules, float multipliers, and altered lockup schedules creates a complex environment where the risks for latecomers are significant, and the primary beneficiaries are likely to be early investors seeking exits.

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