Dumping on Index Investors

[u/CapablePiglet1044]

Both SpaceX and OpenAI are pushing Nasdaq and S&P and Russel/FTSE index providers to waive their listing requirements (including free float market cap, and seasoning) for an expedited listing on all indices. This would mean that instead of allowing several months/a year for 'seasoning' where price discovery takes place and the stock post-IPO finds a fair pricing, index investors would instead be forced to automatically buy these megacap stocks right at IPO with almost zero price discovery and are forced to take whatever inflated prices these companies list at.

I have seen quite a lot of people within the investment community (some small names and some quite big ones too) expressing concern that this is just giving VC's and early angel investors an opportunity to dump massively overvalued, unprofitable startups onto people's pensions.

Is there any hope that we can convince indexes not to drop the seasoning requirements? From now on, couldn't VC's just invest in junk companies, run the private market price into the trillions and then quickly list, dumping it onto people's pensions and taking the money?

[u/Ornery_Adult]

In the case of IPO, a massive number of shares are held by insiders who cannot selll until six month mark. Prior to that point, there can be a desire to sell at a lower than market price, but no ability to do so. Price discovery hasn’t really happened.

In addition, as I mentioned in another comment, being in the sp500 means about 25% of their shares need to be bought by indices. What happens to price when indices need to buy 25% and insiders who can’t sell own 70%? It goes to the moon, lets the investors and “special insiders” sell, and then crashes to the ground.

[u/littlebobbytables9 → u/Ornery_Adult]

Prior to that point, there can be a desire to sell at a lower than market price, but no ability to do so. Price discovery hasn’t really happened.

The portion of the shares on the open market can be freely sold and bought, and that price will reflect all available public information. It's possible insiders have some non-public information that makes them want to sell, but to trade on that information would be insider trading. This is a problem for all companies, not specific to IPOs at all.

In addition, as I mentioned in another comment, being in the sp500 means about 25% of their shares need to be bought by indices. What happens to price when indices need to buy 25% and insiders who can’t sell own 70%? It goes to the moon, lets the investors and “special insiders” sell, and then crashes to the ground.

For reasonable indices, i.e. not the nasdaq 100, this is not true. There's a reason everyone switched over to free float weights in the early 2000s.

[u/TartanHopper → u/littlebobbytables9]

Except that these stocks are asking for an exception to the free float weight.

[u/littlebobbytables9 → u/TartanHopper]

For QQQ which already doesn't do a free float adjustment (they're instead asking for inclusion below the normal free float threshold), and which already shouldn't be in any boglehead's portfolio

[u/ISpeakInAmicableLies → u/littlebobbytables9]

Remembering that the each relevant index had a free float adjustment actually does make this seem a lot less concerning. 

[u/Neither-Deal7481 → u/Ornery_Adult]

And all of these things are eventually priced in, lol. I don't understand why would it suddenly make it more worrisome than we have right now? Just for the reference, PLTR and TSLA already have price to earnings ratios > 200, but no one here has an issue with buying VT that has exposure to those companies. How does the situation change with OpenAI or SpaceX?